History of the Presidential Elections and the Stock Market

History of the presidential elections as the upcoming presidential election between Vice President Kamala Harris and former President Donald Trump draws near, investors are closely examining potential outcomes and their implications for portfolio management. Historical performance trends offer insights, but they come with nuances.

Historical Market Trends

Stock markets generally rise regardless of which party occupies the White House. For instance, the Dow Jones Industrial Average (DJIA) increased by 57% during Trump’s presidency and has gained over 30% under Biden. Historically, stocks have tended to perform better under Democratic administrations. This trend is supported by data from Ned Davis Research, which indicates that the DJIA rose at an annualized rate of 8.2% under Democratic presidents compared to 3.2% under Republicans. When adjusted for inflation, the growth rate was 3.7% under Democrats versus 1.4% under Republicans.

History of the presidential elections shows stocks often rise more under Democrats, according to wsj subscription deals.

Congressional Influence

The composition of Congress also affects market performance. Under Democratic presidents, markets perform better with divided control of Congress. Currently, the market benefits from a Democratic president and a split Congress, with the DJIA showing a real return of 8.1% annually in such conditions. Conversely, Republican presidencies have seen better performance with a Republican-controlled Congress, yielding a 7.1% annual return for the DJIA. This is likely due to expectations of lower taxes and reduced regulation.

Limitations of Historical Data

While historical trends provide useful context, they cannot predict future market movements with certainty. Unforeseen events like the 2008 financial crisis or the COVID-19 pandemic can significantly alter outcomes. Dan Lefkovitz, a strategist at Morningstar Indexes, emphasizes that markets are primarily driven by earnings and cash flow, with political factors being secondary. He advises preparing portfolios to be resilient across various scenarios.

Sector Performance Trends

Ned Davis Research highlights that cyclical stocks often outperform defensive stocks following a Democratic presidential win. Defensive stocks, such as those in consumer staples, healthcare, and utilities, perform better after a Republican victory. From 1972 to 2020, cyclical sectors like communication services, energy, and financials yielded the highest median returns six months post-Democratic victories. Defensive sectors, including healthcare and consumer staples, performed best following Republican wins.

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Sector-Specific Predictions

Looking ahead, banks might benefit if markets anticipate a Trump victory, given potential Democrat-imposed stricter bank regulations. LNG exporters could also see gains, as Biden has paused new approvals for LNG exports. Although Harris has reversed her stance on fracking, she may remain less favorable to oil and gas producers if elected. The industrial sector might experience growth under a potential Trump presidency due to accelerated deglobalization, though increased tariffs and trade conflicts with China could pose risks.

Healthcare Sector Challenges

Healthcare stocks have historically struggled when the president’s party also controls Congress due to the risk of sector overhauls. Both presidential candidates aim to address drug pricing, potentially making the sector challenging. If Harris collaborates with a split Congress, she will support the Affordable Care Act and Medicaid expansion. She will not pursue her previous Medicare-for-all proposal.

Final Thoughts

Lefkovitz highlights that market reactions to elections are often unpredictable and can be short-lived. Interest rates, inflation, and advancements in technology, like artificial intelligence, also play significant roles. For instance, in 2016, investors expected Trump’s agenda to boost small-cap value stocks, but these stocks underperformed in 2017. Similarly, despite Biden’s focus on renewables, traditional energy stocks have performed well under his administration. Investors should evaluate various factors beyond election outcomes when planning their portfolios.

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