If there’s one thing that’s grabbing the media’s attention right now, it’s the US presidential election. With the stakes at stake, it’s understandable that it’s polarizing the public and investors alike. On the one hand, some argue that a Donald Trump victory would bring uncertainty and chaos with new trade and tax policies. On the other, a Kamala Harris victory could trigger significant public investment in climate change, while also strengthening regulation in some sectors and a calmer trade policy framework. For every investor who tells me that the economy will be better off with Trump, another tells me it would be a disaster, and vice versa. So what should you do with your investments in this context?
I am not an expert on American politics, but as an observer of the economy, I have observed that the influence of elections on long-term portfolios is often exaggerated. One reason for this exaggeration is the recency effect, a cognitive bias that causes investors to change their portfolios too quickly after elections that are perceived as positive or negative. Yet historical data shows that in the long run, this does not make much difference. Investors who had chosen to ignore the election and stick with their long-term strategy would generally have done much better than those who tried to play the market in the short term based on the election results.
Let’s take an example. A loyal Republican who invested $1,000 70 years ago in the S&P 500 only under Republican presidents would see that amount grow to $27,400 today. A pro-Democratic investor would have seen his investment grow to nearly $61,800 under Democratic presidents. But here’s what’s more striking: An investor who didn’t try to “sew” his portfolio around changing presidents, and who left his $1,000 invested uninterrupted, would see that amount grow to $1,690,000 today. This simple math shows the cost of partisanship and frequent changes.
Election results do have a short-term effect on markets, but when you step back, you see that economic growth and portfolio returns are little affected by the party in power. Looking at the Dow Jones stock market returns under Democratic and Republican presidents since 1901, the median return under Republicans was 23.8%, compared to 51.1% under Democrats. But when adjusted to a year-over-year basis, the median return becomes nearly identical: 6.6% for both parties.
For investors, the best strategy is often to do nothing. Giving in to the emotions triggered by election results can lead to significant long-term losses. Time remains an investor’s most valuable ally. Even if you were the unluckiest investor of the past 40 years and invested just before the crash of 1987, the bursting of the dot-com bubble, the financial crisis of 2008, or before the COVID-19 pandemic in 2020, you would still have earned an average annual return of 7.2%. That’s enough to double your money every decade, or turn every dollar you invested into eight dollars.
Regardless of our political allegiances, the best thing we can hope for the economy in the next election is a balance of power. Historically, the U.S. stock market tends to perform best when government is divided along party lines. For example, when Democrats control the White House and one house of Congress, but not both, the average return on the S&P 500 has been about 13%. If Republicans have the White House and the Senate, but not the House of Representatives, the average return has been nearly 8%. Full Democratic control has produced an average return of nearly 6%, while full Republican control has produced a return of just 4%.
The worst-case historical scenario was a Republican president facing a Democratic Congress, with an average return of 3.5%. Divided government limits the ability of parties to impose radical changes, which seems to create a climate of stability for businesses and financial markets. Under Barack Obama, for example, compromises were necessary to pass reforms because his Congress was Republican, which helped maintain some balance between market interests and political concerns.
What these numbers show us is that while political promises diverge and elections can create short-term volatility, in the long run it is rarely wise to react impulsively to every election. It is not the election itself that shapes the market, but patience and long-term strategy. By diversifying investments across different sectors, asset classes or geographies, investors can best protect themselves against uncertainty and maximize their chances of long-term success.