The Stock Market & Politics: Historical Patterns

The influence of politics and election cycles on the stock market is coming into focus as the mid-term election approaches. While the historical correlations are real, remember that the economy drives politics far more than politics drives the economy.

The Four-Year Presidential Election Cycle

Historically, the stock market follows a distinct pattern over a president’s four-year term. According to historical S&P 500 data dating back to WWII, the cycle generally moves in phases:

• Year 1 & Year 2: Historically the weakest years. Presidents tend to push through more controversial or painful economic policies early in their terms, and the market often enters a digestion phase.
• Year 3: Historically the strongest year. The S&P 500 has posted positive returns in Year 3 roughly 80% to 90% of the time over the last century. Incumbent administrations typically pump the economic gas pedal, pushing for tax cuts, stimulus, or favorable policies, to prime the economy for reelection.
• Year 4: Solidly positive, but volatile. The first half of the year is usually choppy as market pricing models struggle with uncertainty about who will win. Once the election concludes in November, a “relief rally” typically pushes the market higher into December.

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 Mid-Term Election Dynamics

Mid-term election years (like Year 2 of the cycle) are notorious for high market volatility, but they offer one of the most reliable historical setups in finance.

• The Pre-Election Slump: The S&P 500 historically underperforms in the first 9 to 10 months of a midterm year. Anxiety over which party will control Congress drags on stock prices.
• The Post-Midterm Surge: Once the midterm elections conclude in November, the market has historically rallied fiercely. In fact, since 1950, the S&P 500 has risen 100% of the time in the 12 months following a midterm election, averaging a gain of roughly 15%.

Democrats vs. Republicans: Who is Better for the Market?

When you look strictly at which party occupies the White House, the historical data surprises many investors.

Democratic Presidents (Higher Average Returns)

• Statistically, the stock market has performed better under Democratic presidents. Since 1953, the S&P 500 has averaged roughly 10% to 11% annually during Democratic administrations.

Republican Presidents (Solid, but Moderated)

• Under Republican presidents, the S&P 500 has historically averaged annual returns of roughly 6% to 7%. While Republicans are traditionally viewed as the more “business-friendly” party due to deregulation and corporate tax cuts, their terms have historically coincided with poorly timed macro events, such as the 2008 financial crisis and the 2020 pandemic crash.

Wall Street’s Ultimate Favorite: Gridlock

Despite the party averages, the absolute best-performing political environment for the stock market is political gridlock, specifically, a Democratic President and a Republican or Split Congress.

When power is divided, Washington suffers from legislative paralysis. For the stock market, gridlock is fantastic because:

• It means no major, sweeping changes to tax codes.
• It prevents drastic regulatory shifts.
• It creates a highly predictable environment where corporations can plan 3 to 5 years out without fear of the political rug being pulled out from under them.

Mark Notes

View politics and election cycles in the context of the primary drivers of stock prices. Much like last week’s “Seasons of the Market” post, which discussed historically stronger and weaker months of the year. 

Market movements are primarily dictated by corporate earnings, inflation, innovation, and Federal Reserve interest rate policy. For instance, the historic tech boom of the 1990s and the massive post-pandemic bull market occurred under completely different administrations, but both were ultimately fueled by low interest rates and massive corporate profit expansion.

This article is for general informational and educational purposes only. It is not intended as financial advice, investment guidance, or a recommendation to buy or sell any security. The content reflects publicly available information and broad market commentary. Readers should conduct their own research and consult a licensed financial professional before making investment decisions.