Waiting for the Bottom to Fall? How the Stock Market Reacts to Presidential Elections

By: Hunter Nighbert, Sr. Financial Advisor

Presidential elections in the U.S. can elicit strong emotions and anxiety for investors and often bring significant attention to the stock market, as investors anticipate how political outcomes might influence economic policies. Historically, market behavior around election time follows certain trends, driven largely by uncertainty and speculation about future policy changes.

Pre-Election Volatility

In the months leading up to the election, the stock market typically experiences increased volatility. This is driven by investor uncertainty regarding potential changes in tax policy, regulation, and government spending. Markets often react to polling data and debates, with swings reflecting which party or candidate is perceived to have an edge. For example, sectors like healthcare, energy, and defense often respond differently based on expectations of a Republican or Democratic win.

In recent election cycles the stock markets generally perform positively in the months leading up to the election, as seen in election years such as 2016 and 2020. However, as the election nears and uncertainty intensifies, volatility can spike, particularly if the outcome is unclear. But this usually gives way to positive returns after the election concludes. 

Post-Election Relief Rally

Once the election outcome is known, markets often experience a "relief rally," where the reduction in uncertainty, regardless of which candidate wins, leads to short-term market gains. This phenomenon occurred in 2016 when Donald Trump’s unexpected victory led to an initial drop in futures markets on election night, followed by a substantial rally in the following weeks. A larger sample size still shows positive returns in election years. According to a July article in the US News and World Report, ¹since 1952, the S&P 500 has averaged a 7% gain in election years.

Longer-term trends after an election depend largely on the policies of the new administration. A president introducing stimulus measures or tax cuts can lead to market gains, while policies that increase regulation may cause certain sectors to react negatively. However, it is important to note historically, the stock market has performed well under both Democratic and Republican administrations with no clear correlation to performance based on which party wins the executive branch in any given year. 

As you can see from the below chart², the historical average return for unified Republican and Democratic administrations are quite similar. The main separation happens when there is a divided government. This analysis is based solely on historical data and doesn’t predict future outcomes.  It highlights the advantages of long-term investing and emphasizes that investment choices shouldn’t hinge on the identity of the next President.

Data from 1926 through 2023. Unified government means that the Presidency, the House of Representatives and the Senate are all controlled by a single party. Divided government means that at least one houses of Congress or the Presidency is controlled by the other party. Indexes are not available for direct investment. For educational purposes only.

While there are no guarantees and past performance does not predict future returns, stock markets tend to follow predictable patterns around elections, with pre-election volatility and post-election stabilization. The actual impact depends on a variety of factors, including economic fundamentals, global events, and the policies pursued by the newly elected administration. 

1. Dugan, Whayne.  “Election 2024: How Stocks Perform in Election Years” US News and World Report, July 31st, 2024.
2. Bob French. “Are Republicans or Democrats Better for the Stock Market” Retirement Researcher, https://retirementresearcher.com/are-republicans-or-democrats-better-for-the-stock-market/

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