U.S. Presidential Election Analysis

The 2020 U.S. presidential election is less than one week away and given the high stakes nature of this election, we wanted to provide some analysis of past elections and the implications they had for the stock market.

In an effort to provide some historical context for the upcoming election, the following data points were aggregated and analyzed.

  • Winning party (1868 – 2016)
  • S&P 500 Index percentage change in price the day following an election (1928 – 2016)
  • CBOE Volatility Index percentage change in price the day following an election (1992 – 2016)
Our analysis yielded the following results.

  • The average return of the S&P 500 Index the day following an election was -0.81% (1928 – 2016)
  • The largest percentage gain for the S&P 500 Index the day following an election was 1.77% (1980)
  • The largest percentage loss for the S&P 500 Index the day following an election was -5.27% (2008)
  • The average return of the CBOE Volatility Index the day following an election was -2.94% (1992 – 2016)
  • The largest percentage gain for the CBOE Volatility Index the day following an election was 14.31% (2008)
  • The largest percentage loss for the CBOE Volatility Index the day following an election was -23.27% (2016)
Additional trends specific to political parties were observed as follows.

  • The Republican Party has won 22 (57.89%) of the last 38 presidential elections (1868 – 2016)
  • The Democratic Party has won 16 (42.11%) of the last 38 presidential elections (1868 – 2016)
  • The last time the Republican Party did not hold the presidency for two or more consecutive terms was 1888
  • The last time the Democratic Party did not hold the presidency for two or more consecutive terms was 1976
  • The average return of the S&P 500 Index the day following a Republican victory was 0.08% (1928 – 2016)
  • The average return of the S&P 500 Index the day following a Democratic victory was -1.55% (1928 – 2016)
What we have observed is that market reactions the day following an election are typically skewed to the downside, exhibiting a decline 60.87% of the time. Additionally, there were three instances from 1920 to 2016 when the S&P 500 Index return was statistically significant the day following an election. The first was in 1932 when Franklin D. Roosevelt defeated Herbert Hoover. The S&P 500 Index declined -4.42% the following day and in our view much of the decline was associated with the fact that the U.S. was in the midst of the Great Depression. The second instance was in 1948 when Harry Truman defeated Thomas Dewey, which is regarded as the greatest election upset in U.S. history. The day following Truman’s win, the S&P 500 Index fell -4.61%. This decline was almost purely a result of the election upset. Finally, the 2008 win by Barack Obama resulted in the largest drop in the S&P 500 Index of -5.27%. Similar to the 1932 election, the U.S. was in the middle of the Great Recession, which accounted for most of the decline. The takeaway from these three elections is that the economic backdrop is an important determinant of S&P 500 returns the day following an election. Although, as was evidenced by what occurred in 1948, surprise upsets can cause large market swings as well.

While it is impossible to definitively predict the outcome of the 2020 U.S. presidential election, history can act as a guide in terms of what to expect. We believe in the near-term, a Trump victory would be the most bullish scenario for stocks, particularly those in the financial and energy sectors. We would also expect the CBOE Volatility Index to decline significantly. A Biden win would most likely be more neutral for stocks in the short-term, but a significant boost to fiscal stimulus could help juice equity market returns in the first half of 2021. Generally speaking, a decisive and swift victory for either party will lead to the best outcome for stocks.