How Does the Stock Market Perform in an Election Year? with Nick Maggiulli

This post originally appeared on Nick Maggiulli’s Of Dollars And Data on 5/21/24. Follow Nick on Twitter/X @dollarsanddata and LinkedIn for more!

Be sure to grab a copy of YCharts’ new election guide, How Do Presidential Elections Impact the Market?

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With the U.S. Presidential election set for a rematch in November, many investors are wondering how the U.S. stock market might perform in the months that follow. While predicting the future is never easy, using history as a guide can be useful for understanding how markets might react to a Biden or Trump victory.

To this end, I have written this blog post which will cover:

• How U.S. stocks perform after a Presidential election
• Whether markets seem to favor Biden or Trump
• How Biden and Trump’s policies might impact your finances

Every four years we hear that “this might be the most important election of your life.” But with soaring debt, rising geopolitical instability, and continued economic uncertainty, this time they may just be right. But, before we look at how U.S. stocks might perform after a Biden or Trump victory, let’s look at how stocks tend to perform after a U.S. presidential election in general.

If you want to watch a deep dive on these issues, check out my recent webinar with YCharts:

How Have Stocks Performed After the Election?

In the seven or so weeks following an election there can be lots of uncertainty around how the future might unfold. But, if we look at how markets actually perform after an election, they are typically pretty average. To start, let’s consider how U.S. stocks have performed from “election day” until the end of the year for each year since 1950. Note that when I say “election day” I mean from the Tuesday after the first Monday in November to year end, regardless of whether there was an actual election.

If we were to plot the performance of U.S. stocks over these 35 trading day period every year since 1950, we would see something like this:

As you can see, while stock performance has varied quite a bit since 1950, U.S. stocks tend to rise slightly following an election (or in the same time period during a non-election year). The biggest exceptions to this were in 2008, when markets declined by nearly 11% from election day to year end, and in 1998, when they increased by almost 10% as the DotCom bubble continued to inflate.

However, if we look at the average performance in election years versus non-election years, all these differences wash out. Plotting the average performance of the 18 election years and 56 non-election years in the data, we see basically no long-term difference in performance:

While markets tend to perform worse (on average) in the first few days following the election, there seems to be no lasting impact on stocks through year end. In fact, the average return following election day through December 31 is 2.3% in an Election Year compared to 2.4% in a Non-election Year. In other words, their returns on average are basically the same. The median (50th percentile) return is similar as well with a 2.9% return in an Election Year compared to 2.4% during a Non-election year.

Overall, the U.S. Presidential election doesn’t seem to have any lasting impact on markets in the weeks following the election. However, is this still true in the Biden/Trump era? Let’s see.

Do Markets Favor Biden or Trump?

When it comes to whether markets “favor” Biden or Trump, there are many other factors at play that have nothing to do with either President or their policies. Nevertheless, we can take a look at how stocks performed following each of their election wins and during their presidencies as well.

When Trump won the 2016 election to almost everyone’s surprise, many believed that U.S. stocks would crash as a result. Jane Street, a prominent quantitative trading firm, was one of them. After finding a way to get the 2016 election results minutes before the rest of the mainstream media, Jane Street still ended up losing money because they got the market’s reaction wrong. As Michael Lewis recalls in Going Infinite:

“What had been a three-hundred-million-dollar profit for Jane Street was now a three-hundred-million-dollar loss. It went from single most profitable to single worst trade in Jane Street history.”

This illustrates how difficult it can be to predict the reaction of markets, even for the smartest people in the room.

Nevertheless, while markets reacted positively to both the Trump and Biden victories in 2016 and 2020, Biden saw much better performance following his election win in late 2020:

Overall, U.S. stocks performed better than average after both Trump and Biden’s election victories. However, with the market increasing by 4% in 2016 and 7% in 2020, Biden is the clear post-election winner.

However, if we look at how U.S. stocks performed throughout the rest of their presidency, it seems like Trump will be the clear winner when all is said and done. The chart below, which comes from YCharts, highlights this by showcasing the performance of every U.S. president from JFK in 1961 through Biden today:

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While Biden’s presidency isn’t over yet, the market has a lot of catching up to do if it’s going to match or beat how it performed during Trump’s tenure.

One of the reasons I love this chart is because it illustrates that U.S. stocks tend to rise regardless of which political party is in office. This suggests that the factors that impact stock prices have less to do with who’s in office than we might initially believe.

Some of you will see the chart above and point out how the only two negative periods occurred when Republican presidents were in office. That is technically correct. However, it is also true that these negative periods occurred immediately after Democratic presidencies. So who’s to blame? The Republicans? The Democrats? Neither? No one knows.

When YCharts looked into this issue in their latest Election Guide, they found more or less the same thing. Markets don’t tend to do any better whether Republicans or Democrats hold the reins.

This data demonstrates why it is difficult to determine whether markets truly favor Biden or Trump. While Biden seemed to be a sigh of relief for markets at the end of 2020, this didn’t translate to better overall performance throughout the rest of his tenure (thus far). This means that how markets will perform following a future Biden or Trump victory is anyone’s guess.

While it’s hard to know whether markets prefer Biden or Trump, it’s much easier to analyze how their policies will impact your finances. Let’s turn to that now.

How Will Biden/Trump’s Policies Impact Your Finances?

With President Biden’s recently released 2025 tax plan, discussions have ensued about how a Biden or Trump presidency could affect your bank account. While the economic policy proposals of both candidates are still being finalized, here is what we know about each thus far.

• Biden: President Biden’s policy proposals focus on raising taxes on the wealthiest members of society in a few key ways.
  • Taxing capital gains at ordinary income rates: Biden is proposing raising the long-term capital gains rate to be the same as the tax rate on ordinary income for those earning over $1 million. Under his proposal, the new long-term capital gains rate (with the net investment income tax) for those in the highest bracket would increase from 23.8% to 44.6%.
    • This policy is a huge change from prior years, so I doubt it passes in its current form. However, I wouldn’t be surprised if capital gains rates increase somewhat if Biden wins the election.
  • Tax unrealized capital gains at the 25% rate: Biden is also proposing taxing unrealized capital gains at the 25% rate for those with wealth exceeding $100 million. This is a very controversial policy as it would require very wealthy individuals to sell down their assets even if they don’t have a perfectly defined value yet.
    • For example, imagine a startup founder who owns 30% of a company that was just valued at $1 billion. According to this proposal, the founder would need to (somehow) sell a part of their equity to raise the cash to pay a 25% tax on their $300 million in unrealized capital gains. 
    • I doubt such a controversial policy ever passes, but it gives you an idea of how Biden plans to raise revenue by focusing on the ultra-wealthy.
  • Eliminate the “stepped-up basis” rule: The stepped-up basis rule basically allows individuals to pass on property after their death without transferring any historical capital gains to their heirs. In other words, the basis on all their property is stepped up to the value of the property on the date of their death. Biden’s proposal would eliminate this rule, meaning that capital gains taxes would now be owed on property transfers.
    • For example, imagine someone buys $100,000 worth of stocks and two decades later they are worth $500,000. If they were to sell those stocks before they die, they would have to pay capital gains taxes on the change in value ($400,000). However, if they pass on those stocks to their heirs after they die, the $400,000 in capital gains would be completely erased. Biden’s proposal would not erase these gains and make them owed to the U.S. government once the heirs sold their property.
    • While this might be controversial, I actually like this proposal because I believe wealth transfers of this sort are one of the biggest sources of wealth inequality in the U.S. Whether or not it is “fair” is a different issue, but I believe eliminating stepped-up basis would slow down rising wealth inequality.

Overall, Biden’s policies would raise revenue mostly from wealthier households. Such policies would help slow down the country’s ever-expanding debt, but might also have a negative impact on financial markets (depending on which policies pass). Raising the capital gains rate and taxing unrealized capital gains at a higher rate would incentivize individuals to sell their assets sooner to avoid the higher, future tax. All else equal, a lot of selling would lead to depressed asset prices, which could trigger worse economic conditions. If you want to dig deeper into Biden’s proposed policies, Noah Smith did an excellent analysis of them a few weeks ago.

• Trump: While Donald Trump’s policies haven’t been finalized, his focus will be on lowering taxes while also imposing tariffs on products coming in from abroad.
  • Extend tax cuts: The 2017 Trump tax cuts are set to expire at the end of 2025, but Trump plans to extend them, if possible. His belief is that lower taxes lead to more economic growth and he has continued to echo this belief on the campaign trail. 
  • Import tariffs: Trump has been known for imposing tariffs on imported goods, particularly from countries like China. If re-elected, he may continue this policy, which could lead to higher prices for consumers on imported products. However, Trump argues that such tariffs protect American jobs and industries from unfair foreign competition. Overall, the import tariffs are likely to raise prices on imported goods, which won’t help slow inflation in the U.S. The impact of these tariffs on your pocketbook will vary based on the types of goods you tend to purchase.
  • Federal Reserve influence: A recent Wall Street Journal article suggests that some of Trump’s top advisors believe that Trump should be more involved in setting interest rate decisions. This has led to fears in Washington that Trump could undermine the independence of the Federal Reserve in setting monetary policy. While there is no official proposal coming from the Trump camp suggesting this, Trump has been an outspoken critic of the Fed’s interest rate decisions in the past. If such a plan comes to fruition, Trump may try to influence interest rates lower to stimulate economic growth.
    • Overall, I am generally against political interference in monetary policy. Such interference could lead to inflation, financial instability, and lowered credibility of the central bank. The Fed’s independence is necessary for maintaining the stability and integrity of the U.S. financial system. If such independence were removed and politicized, it could lead to all sorts of negative effects.

While Trump’s policies are likely to improve your finances in the short-run thanks to continued tax cuts (and possibly lower interest rates), I am worried about their impact in the long run. Unfortunately, Trump’s policies don’t do anything to directly reduce or slow the growth of the national debt. Yes, Trump’s focus on growth may help the U.S. in a lot of ways, but I am worried that we could end up in a worse fiscal position four years from now as a result.

Now that we have looked at how each candidate’s policies could impact your finances, let’s wrap things up by discussing what ultimately matters when it comes to how stocks perform in an election year.

The Bottom Line

While the outcome of the 2024 U.S. Presidential election remains uncertain, history suggests that the stock market is likely to perform similarly regardless of who wins. In the short term, markets may react positively or negatively to the election results, but those effects tend to even out over time.

While the stock market’s reaction to the election is likely to be uneventful, the policy proposals of each candidate could have a significant impact on your personal finances. Biden’s focus on raising taxes on the wealthy and eliminating the stepped-up basis rule could slow rising wealth inequality, but may also lead to lower asset prices. Trump’s emphasis on extending tax cuts and imposing import tariffs could benefit consumers in the short term, but may also contribute to a growing national debt.

Ultimately, the key to navigating the uncertainty of an election year is to stay informed and avoid making emotional decisions based on short-term political events. The U.S. economy and stock market have made it through countless political cycles before and will make it through this one as well. So no matter who wins in November, history suggests that staying the course is often the best course of action. 

Happy investing and thank you for reading! If you want to dig deeper on this issue, I recommend checking out YCharts’ guide on how U.S. Presidential Elections impact the market:

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