What the US elections mean for investors

07 September 2020 | Markets and Economy


By Adam Schickling, Vanguard economist, and Jonathan Lemco, Vanguard senior investment strategist.

Few events can be as uncertain and last as long as the run-up to a US presidential election. For a year or more, the election is constantly in the news, frequently in the context of how it may affect investment portfolios. Many observers, including some in the investment management business, offer market predictions based on which candidate or party may be victorious.

At Vanguard, we believe that such forecasts are dubious – much like most-short term predictions – and that investors should let the long-term historical context guide them.

To test this, we analysed more than 150 years of asset returns to see whether a relationship with electoral events existed. We examined not only returns under Republican and Democratic presidents but also whether election year uncertainty exposed markets to lower returns and/or higher volatility.

While historical performance is not a guarantee of future results, 150 years is a large enough data set with which we might form some reasonable future expectations. Discounting the past because, somehow, ‘this time is different’ is falling prey to a classic investing fallacy.

Elections, returns and volatility

Based on a portfolio comprising 60% shares and 40% bonds, we did find a modest difference in returns depending on whether a Republican or Democrat sat in the White House. However, the difference is statistically insignificant and it offers little to no value as part of an investment strategy.

We also found that a modest return differential exists between presidential election years and non-election years. But, again, this result is statistically insignificant and likely attributable to randomness, or ‘noise’, as the chart below demonstrates.

Different ruling parties, similar returns

Past performance is not a reliable indicator of future returns.

Source: Vanguard calculations of a 60% equity, 40% fixed income portfolio based on data from Global Financial Data as of December 31, 2019. The 60% equity portion is determined by the GFD US-100 Index and the 40% fixed income portion by the GFD US Bond Index, as calculated by historical data provider Global Financial Data. Returns are calculated in US dollar terms and exclude the impact of fees. Years are categorised based on which political party occupied the White House for the majority of the year.

History suggests that investors shouldn’t be concerned about material differences in returns under different political administrations. But how does the market respond during an election year?

Our analysis of monthly returns failed to detect any performance pattern. Several different months were as likely to be ranked first as they were to be second, or fifth, or 12th. The number of unique months in any performance rank over the last dozen presidential election years averaged 7.2. In short, monthly returns during election years are very close to random, as the chart below shows.

A near-random monthly performance distribution

Past performance is not a reliable indicator of future returns.

Source: Vanguard calculations of Standard & Poor’s 500 Index returns in election years in US dollars, based on data from Thomson Reuters.

Most tactical election-year investment strategies have suffered from so-called look-ahead bias, generating hypothetical outperformance using information that wasn’t available at the time. A ‘buy November’ strategy may have been promoted heading into 1984, based on its performance in 1972 and 1980, but then it underperformed in 1984 and also in 1988.

Investors similarly shouldn’t expect stock market volatility to be higher in the run-up to an election either. If anything, our study found that markets are relatively calmer in the weeks leading up to and following a presidential election than over a full market period. The result, though, is not statistically significant.

Stock market volatility is slightly lower in the weeks before and after an election

Source: Vanguard calculations of S&P 500 Index daily return volatility from January 1, 1964, through December 31, 2019, based on data from Thomson Reuters.

A multiple-issue issue

Most events that might lead an investor to think about straying from a well-considered long-term strategy are single-issue events. US presidential election-year politics, though, touch upon multiple issues to inform four years of policy-making. They can also have global ramifications.

So it's not hard to see why the US presidential elections might weigh on an investor’s psyche. But it’s important that investors not lose sight of their personal investment goals and their own long-term strategies. Financial markets are incredibly complex systems affected by a great many different external variables whose levels of importance depend on market valuations, business cycles and investor sentiment, just to name a few.

Politics – even US politics – is just one of these many variables, offering little to no insight in isolation.


1As of 31 July, the US markets accounted for 57% of the FTSE Global All Cap Index Fund.


Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Other important information:

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© 2020 Vanguard Investments Switzerland GmbH. All rights reserved.