There’s no question that the stock market has been bumpy this fall. After setting new records initially, the major indexes (which track the majority of stocks listed) have been bouncing up and down for weeks.
There are plenty of factors that can affect stock prices on a day-to-day basis—from company earnings reports to economic data to presidential tweets—but uncertainty about upcoming election results can also weigh heavily during presidential or midterm election years.
Over the long run, no election (or any other force) has proven powerful enough to change the historical upward trajectory of the U.S. stock market. But the outcomes of nationwide elections—and the speculation in the runup to them, too—have had the power to move markets in the short term.
What usually happens to the stock market around elections?
Typically, in midterm election years (like this one), we’ve seen stock prices decline during the months leading up to Election Day, then rebound in the months following.
Do election results immediately affect the stock market?
Let’s look back in recent history for instant market reactions. The last two presidents arguably had among the most surprising paths to their first-term victories in U.S. history, defeating experienced candidates who many assumed were shoo-ins for the White House.
And the stock market really doesn’t like surprises. On Election Day in 2008, Standard & Poor’s 500-stock index jumped 3.5 percent. But the very next day, after the votes were tallied and Barack Obama’s win was sealed, it lost all those gains and then some, falling 5.2 percent.
In 2016, the days leading up to the election saw substantial gains in the major stock indexes when candidate Hillary Clinton seemed to be in the lead. On Election Day Eve alone, the S&P 500 rose 2.2 percent. However, as the polls turned in favor of now-President Donald Trump, the market turned, too.
Around midnight on Election Day, S&P 500 futures—which indicate where the index will open the next trading day—briefly sank more than 5 percent. But by the time Clinton conceded, they’d bounced back a lot. When the markets opened on November 9, 2016, the S&P 500 was a mere 0.37 percent below its closing price from the day before and actually wound up 1.49 percent higher at the end of that trading day.
Then what happened?
In both cases, the market ultimately adjusted to the new president and eventually continued to march higher.
Under President Obama, the index continued to decline for a few months (remember he was elected during the Great Recession) before turning around in March 2009 to kick off the longest bull market in history. Note, too, that the midterm elections during President Obama’s first term turned out largely unsurprising results—handing the Democratic majority in the House to Republicans and narrowing the divide in the Senate—and did not disrupt the bull’s early charge.
And surely we’ve all heard about the Trump rally. The bull has continued to run, despite slowing down and experiencing plenty of stumbles this year. Still, the S&P 500 is up about 27 percent since opening on November 9, 2016.
Of course, downturns happen, too, and not every president has enjoyed the upside throughout his tenure. Four of the 20 U.S. presidents since 1900 served through periods of loss for the market. But the general direction of the market has been ever higher.
So what should we do with this information?
Try to ignore the noise and stay the course. You may just want to shut off market news on November 7, the day after the midterm elections. And keep your eyes on the long-term prize.
Current predictions point to Democrats taking control of the House and Republicans maintaining the Senate. However, the current political climate is not exactly normal, making election results particularly difficult to guess. And, again, we know how the market feels about uncertainty, which helps explain some of the volatility we’ve been seeing recently. Once the votes are counted, though, at least some of that uncertainty can be quieted.
So stay focused on those results and sticking with your investing plan. And remember: Every market downturn in history has ended in an upturn. That fact doesn’t change no matter who’s in charge.
October 24, 2018