November third is fast approaching, and investors may be wondering how the 2020 presidential election might impact their portfolios. Here’s what we know from a historical perspective.
The Presidential Election Cycle Theory
The Presidential Election Theory, developed by stock market researcher Yale Hirsch and featured in the 1967 Stock Trader’s Almanac, analyzed the stock market data over several decades over the four-year term of sitting presidents. Hirsch’s theory suggests that stock markets perform weakest during the first two years of a presidential term when the president tends to work on the proposed policy reform that got them elected.
During the second half of their term, presidents shift their focus to improving the economy to get re-elected. As a result, many stock indices gain in value – and the results tend to be consistent regardless of whether the president is Democratic or Republican.
An analysis conducted by Charles Schwab in 2016 found that the third year of a presidential cycle tends to have the most substantial gains:
Average S&P 500 Index returns each year of an election cycle:
- Year after the election: +6.5%
- Second year: +7.0%
- Third year: +16.4%
- Fourth year: +6.6%
However, many things tend to be at play during election years – especially in 2020.
Short-term stock market results can vary depending on factors, including gridlock in the House and Senate, and whether the election involves an incumbent candidate or a sweeping election victory. Tracking trends like this in the stock market tends to be easier than understanding why they occur.
2020 is turning out to be a year unlike any other. After an 11-year bull run, we slid into a bear market amid the COVID-19 pandemic. It’s uncertain how long the pandemic will last and how quickly we can recover once a vaccine is available. These variables make it difficult, even with the historical data we have, to determine how the fourth quarter of 2020 will play out.
These reasons are why it is important to remember that time in the market beats timing the market. Stay focused on your long-term financial strategy for stable growth in your portfolio and discuss any concerns you have with your financial professional.
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