“There’s nothing wrong with wanting your preferred candidate to win, but investors can run into trouble if they place too much importance on election results. That’s because, historically, elections have had little impact on long-term investment returns,” Miller wrote in Can Midterm Elections Move Markets?
“In 2020, many investors feared the ‘blue wave’ scenario, or Democratic sweep,” he continued. “But despite these concerns, the S&P 500 rose 42% in the 14 months following the 2020 election.”
While conventional wisdom would have one think that a president of one party and a congress of another would be a volatility-inducing quagmire, the numbers say just the opposite, according to Detrick.
When he looked at stock market performance based on the party makeup in Washington, D.C., he found that the most profitable combination of all was a Democrat president with a Republican congress. In that scenario, the S&P 500 produced an annual return of 16.3% the year following the election. A Democrat president with a split congress yielded a 13.6% return, while the weakest combination was with a Democrat congress, bringing in a 10.1% return.
Meanwhile, a Republican president with a Democrat congress only yielded a 4.9% return, and with a Republican congress a 6.7% return—both far below what a Democrat president saw. But equity returns under a Republican president with a split congress did as well as under a Democrat president in the same circumstances—13.7%.
“Midterm elections are very important for a lot of reasons,” Detrick concluded. “But the best part for investors is once the election is over, stocks tend to get a nice tailwind.”