Election Day Performance (Stock Markets – Backtest)
Last Updated on November 23, 2022
The US has two main political parties, with different ideologies and policy directions. It is expected that the party that controls the White House and Congress can have a huge impact on equities markets. But what has been the election day performance in the stock market? What has been the performance after election days?
As with many other sociopolitical events, election periods affect stock market performance. Although forecasting the market is mostly futile, previous tendencies in stock market performance before, during, and after election day can be a good guide. But note that while history can provide valuable insight into the market, it does not make any guarantees.
In this post, we take a look at how elections affect stock market performance. We finish off the article with multiple backtests of the election day (in the stock market – S&P 500).
We start by looking at the midterm elections:
How does the stock market perform during midterm elections?
The stock market’s performance during midterm elections can be classified into two categories: pre-midterm and post-midterm elections.
- Pre-midterm election performance: In the year leading up to the midterm elections, the S&P 500 seemed to underperform significantly. The index’s average yearly return in the 12 months preceding the midterm election is around 0.3 percent, which is much lower than the historical average of 8.1 percent. Source: Stock Trader Almanac.
- Post-midterm election performance: The post-midterm election narrative is completely different. In the year following the midterm elections, the S&P 500 index outpaced the market by 16.3 percent. This is true for the 1- and 3-month periods following the midterm election, which showed a significantly higher return than the period without a midterm election. Source: Stock Trader Almanac.
Why the market underperforms in the 12 months before the midterm elections and overperforms in the 12 months following the midterm can probably be attributed to political uncertainty. The market is quick to react to such a situation.
Not knowing the political party that will hold the majority in congress, it is quite unclear which economic and social policies will take priority. This is why the market performs poorly before the mid-term election. The uncertainty usually fades away after the election. In general, the stock market hates uncertainty and often rallies when this is gone, no matter the election result.
Although the market may suffer from volatility during this period, the outcome of the midterm election is not an indicator of the market performance. The market responds to the removal of uncertainty, rather than the election result. As such, the health of the economy becomes the driver of the market, rather than the midterm election result.
The last time the S&P 500 produced a negative return during the 12 months following the midterm election was 1939 — a time when the U.S. faced the ever-talked-about Great Depression and the beginning of WW II in Europe.
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During times of slow economic growth like the 1960 and 1970s, the average pre-midterm return was down. Apart from, the five midterm periods in the 1960s and 1970s, the average return for the pre-midterm election years was about 8.1 percent, which is roughly close to the average annual return of the S&P 500.
However, the economy has shown steady growth over the years, with the action of central bank policy towards keeping inflation low suggesting that the overall health of the economy is a much better indicator of the market than policy uncertainty.
How does the stock market perform during the presidential elections?
Out of the 24 election years spanning from 1928 to 2020, the market has been up about 20 times, only showing negative average four times. A theory initially brought to light by Yale Hirsch in The Stock Trader’s Almanac, which is termed the “Presidential Election Cycle Theory”, suggests that the market is strongest in the third year and performs the weakest in the first year following the president’s term.
However, while this theory may have held for much of the 20th century, doesn’t seem to hold up in this 21st century. For example, during the presidency of Barrack Obama and Donald Trump, the stock market theories failed to hold up. During the two Obama terms, the first year was more profitable than the third. And for Trump, the first year saw a more substantial return than the second before a major upturn in his third year and followed by the 2020 volatile markets.
Investors trying to take advantage of the presidential terms should be mindful of the shift in the 21st century. If you followed the theory that the fourth year of a presidential term sees a better return than the first, then look at the events that played out in 2008 compared to 2005. During George W. Bush’s second term as president, the S&P 500 saw a return of 4.9 percent in the first year. However, the 2008 election year saw a market decline of 37 percent. If you had invested in the stock market from late October 2006 to December because of the presidential theory, your portfolio would have suffered a massive loss.
Will the midterm election affect the stock market?
The effect of the midterm election on the stock market often depends on the uncertainty surrounding the election and the overall health of the economy. The sentiment surrounding the outcome can also play a role in the market. Markets don’t just react to events on their own, investors sentiment is what drives the market.
While the stock market may become volatile during the midterm elections, the reaction is often short-lived. The current state of the economy could be a major factor in the post-midterm election period. For instance, during a recession, the outcome of the midterm can set the tone for the market. On the other hand, during a stable economy, the market may not react much to the midterms.
Will the presidential election affect the stock market?
The presidential election can have a pronounced effect on the market and is dependent on the outcome. The Democrats and Republicans have different views and policies on how to handle the economy.
The individual stance of each party can alter the current state of the economy which can in turn affect the stock market. It depends on the president’s outlook and plans for the economy. Trump promised tax cuts and fiscal policy changes favorable to corporations, and his election had a huge effect on the market.
How do political conditions affect the stock market?
Political conditions affect the market in terms of the policies that are being implemented. The economy is been run by businesses and the decisions made by the government can be favorable and not favorable to some businesses.
How political instability affects the stock prices of a company?
If there is one thing the market dislikes, it is uncertainty. Uncertainty can put fear in the market. A politically unstable economy gives investors no confidence in the market, and when there is no confidence, the market tends to suffer.
Midterm election stock market history
Here’s a table that shows the history of mid-term elections and S&P 500 performance:
Presidential election stock market history
The table below shows the history of presidential elections since 1928 and how the market performed in each case:
|1928||43.60%||Hoover vs. Smith|
|1932||-8.20%||Roosevelt vs. Hoover|
|1936||33.90%||Roosevelt vs. Landon|
|1940||-9.80%||Roosevelt vs. Willkie|
|1944||19.70%||Roosevelt vs. Dewey|
|1948||5.50%||Truman vs. Dewey|
|1952||18.40%||Eisenhower vs. Stevenson|
|1956||6.60%||Eisenhower vs. Stevenson|
|1960||0.50%||Kennedy vs. Nixon|
|1964||16.50%||Johnson vs. Goldwater|
|1968||11.10%||Nixon vs. Humphrey|
|1972||19.00%||Nixon vs. McGovern|
|1976||23.80%||Carter vs. Ford|
|1980||32.40%||Reagan vs. Carter|
|1984||6.30%||Reagan vs. Mondale|
|1988||16.80%||Bush vs. Dukakis|
|1992||7.60%||Clinton vs. Bush|
|1996||23.00%||Clinton vs. Dole|
|2000||-9.10%||Bush vs. Gore|
|2004||10.90%||Bush vs. Kerry|
|2008||-37.00%||Obama vs. McCain|
|2012||16.00%||Obama vs. Romney|
|2016||12.00%||Trump vs. Clinton|
|2020||18.40%||Biden vs. Trump|
Source: Dimensional Matrix Book 2021
Stock markets after US elections
The US economic climate can be left in uncertainty for a while after the elections. However, the effect of the outcome of the election is usually short-lived and should not be used to forecast the broader outlook of the market. The overall health of the economy has a greater effect on how the market performs following an election than the outcome of the election itself.
Will election results affect the stock market?
Whether the result of the US elections will affect the stock market depends on many factors; the health of the economy plays a huge part. However, the two main political parties in the US have different stances on fiscal policy, which investors also put into consideration.
The day after the 2022 midterm election was followed by a decline in the S&P 500 index as well as the DJIA. While whoever controls the House of Representatives and the Senate may attract some form of reaction in the stock market, this is usually short-lived as history suggests.
4-year presidential cycle stock market
The 4-year presidential cycle is a theory in the stock market that claims that stock market performances in the third and fourth year of a presidential term outperform the stock market of the first and second presidential term.
The table below is the historical returns of the stock market based on this theory.
|Cycle Year||Total % Stock Market Gain Since 1833||Average Percentage Stock Market Gain Since 1833|
|Post-Election Year (Year 1)||137.70%||3.00%|
|Mid-Term Year (Year 2)||188.90%||4.00%|
|Pre-Election Year (Year 3)||489.60%||10.40%|
|Election Year (Year 4)||282.40%||6.00%|
It is important to note that the theory has not faired well since the turn of the 21st century. So, be mindful of that.
What political factors affect the stock market?
Many political factors can affect the stock market. Some of them include the risk of war, public unrest, trade wars, tax policies, and many other factors.
In addition, elections or budget announcements can influence the volatility of the market.
Stock market during election years
The election year comes with a lot of noise, as the media keeps trying to make the headlines. Depending on the news, the market may react to whatever wants to, but such reactions are often short-lived.
By and large, the effect of the election year is not a directional indicator of the stock market as other factors are always in play — most importantly, the state of the economy!
Election day performance – stock market backtests
Let’s look a bit closer at the short-term returns around election days.
We ran some backtests with strict trading rules and settings so we can better evaluate the historical performance. We looked at each election back to 1960 – in total 31 elections.
As a proxy for the stock market, we look at S&P 500 (excluding dividends).
Let’s go to our first backtest of the day:
Performance after any election day
As mentioned earlier in the article, the performance after any election day is bullish.
The equity below shows the performance of being invested in the S&P 500 from the trading day before any election day until early January next year (this is 45 trading days):
The average gain is 2.75% (not including dividends). The worst year is 2018 with a negative 10%.
BUT! This is a bullish period in most years for stocks anyway, and the average is just slightly higher than the average every year for this specific period.
Performance after and before election day
Let’s make a new backtest where we are invested from the first of November until the third trading day of the new year. Election day is always in early November and thus we capture the few trading days before the election day.
The average gain from the 1st of November to the third trading day of January is 3.4% (only during election years.
Let’s look at presidential election returns.
Stock market performance in presidential election years
Again, we invest at the close of the trading day before presidential election day and sell in early January next year:
The average gain is 2.9%.
Let’s look at midterm election returns:
Stock market performance in midterm election years
Again, we invest at the close of the trading day before midterm election day and sell in early January next year:
The average gain is 2.6%.
Let’s look at what the stock market performance is like before any election day:
Stock market performance before election day
We invest at the close of September and sell at the close of the last trading day before any election day:
The average gain is 1.8%, more or less the same as the average during all years (election or not). However, it’s not as consistent as in the previous backtests above.
Let’s do a last backtest:
What is the stock market performance on election day?
We buy at the close of the last trading day before any election day, and we sell at the close on the election day or the next trading day (when election day was a non-trading day):
The average gain on election day is a solid 0.53%, many times higher than any normal trading day (please see our report on overnight trading). It’s also quite consistent, so this seems like a viable trading edge.
Amibroker code for election days
If you want to have the code for the backtests done in this article, you can get them plus over 150 other trading strategies and ideas (list of trading strategies) we have published for free since 2012:
Election day performance -summary
Election days are, in general, positive for the stock market during a short period after the election, but not so much if we consider the overall bullish performance in the stock market during this period (whether election day or not).
The biggest trading edge seems to be on election day itself, which has a return that is many times higher than any random trading day. Too bad there is an election once every two years!