With the 2024 election upon us, investors are starting to wonder if, and how, the outcome may impact the stock market. These days, it seems as if what is going on in Washington D.C. has a direct impact on what happens in the stock market. But is this the case? In this post, we will attempt to answer this timely question by looking at historical stock market data for some evidence of any discernable patterns.
Good news! Election years tend to bode well for the U.S. stock market (as approximated by the S&P 500). Since 1926, the inception year of the S&P 500, we have seen 24 election years. Out of these 24 election years, 20 of them have seen positive returns. That's the good news. But what about the other 4?
The 4 negative returning election years were: 1932 (down 8.2%), 1940 (down 9.8%), 2000 (down 9.1%), and 2008 (-37%). Let's examine these 4 election years a little further to see what was going on, besides an election:
- 1932 - This was the height of the great depression. Unemployment was over 23% and banks and other businesses were continuing to collapse. Beyond just an election, this was the primary focus of the stock market during this time.
- 1940 - At the end of 1939, Germany invaded Poland to begin World War II. This was undoubtedly a scary time in our nation. While the U.S. didn't enter into WWII until 1941, no doubt the conflict was weighing on investors during 1940, when the S&P 500 ended the year lower.
- 2000 - While many of today's investors may not remember 1932 or even 1940, most will remember what was going on in the year 2000. Much of the country was consumed with making sure their systems were "Y2K compliant". The market however was unraveling as the tech bubble began to burst. Many "fly by night" companies that popped up with a dot-com name suddenly folded, causing a severe market crash during this election year. Undoubtedly, this was the main cause of the decline in the year 2000.
- 2008 - I don't think the year 2008 needs much explaining when it comes to stock market history. Most investors still have scars from the "great financial crisis" of 2008. During this election year, mortgages started to falter, which caused fears that our banking and financial system were going to collapse. I'm pretty certain the collapse of Bear Stearns and Lehman Brothers was the primary cause for the stock market decline, not the election.
Contrary to popular belief, the stock market isn't significantly influenced by election cycles. While elections can shape our national values and beliefs, they have a limited impact on how investors perceive businesses and allocate their funds. As we navigate this election season, we encourage investors to disregard the negativity and remember that the stock market is driven by a multitude of factors, not solely by elections.