Why Smart Investors Don't Panic in Election Season

Election seasons tend to bring a large amount of uncertainty, especially when government races are closely split along party lines. While election years tend to produce more market volatility than non-election years, investors taking a long-term approach are better off weathering the storm with a “wait-and-hold” approach. 

Let’s take a closer look at how elections affect the stock market, what influence the president’s party has on investment returns, and a few tips on how to invest during a turbulent election cycle.

Why Elections Bring Market Volatility

Investor emotions like fear, greed and uncertainty all play a role in the ebb and flow of stock prices—and these emotions often come to a head during election seasons, especially when candidates present very diverse economic policies and plans.

During election season, there is more uncertainty surrounding what taxes, foreign trade restrictions, regulations, and other parts of economic policy will look like in the coming years.  This uncertainty bleeds into share prices, driven by investors’ speculations about the future.

Historical patterns show higher volatility for the 50-day periods before election days, as investors try to use whatever information is available to predict share price movements based on hypothetical future policies. The highest level of market volatility is usually seen in the days leading up to election day, especially when races are tight. 

Historical Market Performance in Election Years

Despite heightened volatility, historical data suggests that U.S. stock markets tend to see positive performance during election years. On election day, the S&P 500 index has traditionally posted an average positive return of 0.92%, while the day following election day has historically produced a -0.71% correction. 

While the S&P 500 has traditionally risen during election years, average annual returns are slightly lower compared to non-election years. The average return rate of the S&P 500 is 7.5% during election years versus 8% during non-election years. This slight dip in performance can be partially attributed to the “wait and see” approach of many investors who shift toward lower-volatility assets until there’s more certainty about the political landscape.

Does the President’s Party Matter?

The stock market has performed well under both Democratic and Republican presidents.

From 1952 through June 2020, annualized real S&P 500 returns under Democratic presidents have been 10.6% annually compared to 4.8% for Republicans. However, this trend should not be interpreted as a sign to only invest during blue presidencies. 

Macroeconomic circumstances are much more important to investment returns than presidential party. When you consider the circumstances surrounding each president’s time in office, it becomes clear that growth trends are largely set in place before the president is sworn in.  

For example, Barack Obama took office in 2009, near the tail-end of the Great Recession, when the country was primed for recovery. This caused the S&P 500 to increase by more than 44% in his first term—a massive jump better attributed to the overall economy than his party or policy decisions.

Similarly, in the last year of Bill Clinton’s presidency, the burst of the dot-com bubble caused the S&P 500 to fall more than 6% in his last years in office following a first term of more than 35% growth. George W. Bush inherited this economic crash, causing mostly negative returns in the stock market until the end of his first term. In 2003, the S&P 500 jumped more than 28% in a single year—another bump more attributable to circumstance than policy. 

The bottom line? While political party affiliation can influence policies (like taxes, regulations, and government spending), it’s not a reliable predictor of market performance. Long-term investors are better served by focusing on economic fundamentals rather than trying to time the market based on elections.

Which Sectors Gain or Lose from Elections?

Some stock sectors are associated more strongly with growth under a particular political party due to the business they operate under.

Sectors that have historically seen growth under Republican presidents include: 

• Traditional Energy (oil, gas, etc.): Republican policies often favor domestic energy production and reduced environmental regulations, which translate to higher returns for the oil and gas sector. Following the 2016 election, the Energy Select Sector SPDR Fund (NYSEARCA: XLE) experienced significant growth until COVID-19’s market impact hit the sector.
• Defense and Aerospace: Republican policies also tend to favor increased spending on domestic defense and the military. During Donald Trump’s 2024 election campaign and subsequent election, the iShares U.S. Aerospace & Defense ETF (BATS: ITA) saw fund values jump by more than 40%.  

Sectors that tend to perform better during Democratic presidencies include:  

• Renewable Energy: Democratic leadership usually supports subsidies and aggressive climate goals to reduce environmental impact. This usually causes a boost in share prices for companies that produce alternative energy from solar, wind, or nuclear sources. After Biden’s 2020 win, the First Trust EIP Carbon Impact ETF (NYSEARCA: ECLN) jumped over 20% within two months and remained strong through 2022. 
• Healthcare: Democrats tend to want to expand healthcare access, benefiting sectors like managed care and hospital services.​ One notable example is the S&P Managed Care sector, which rose by over 1,100% in the nine years following Obama’s introduction of the Affordable Care Act (ACA), eclipsing the S&P 500’s returns over the same period.

Tips for Investing During Election Cycles

Thinking about buying or selling strategically depending on election results? According to historical research, you’re more likely to see a dip in your portfolio following this strategy when compared to a long-term hold approach that includes purchases across parties. 

Research from Goldman Sachs suggests that limiting investments to only one party’s presidency—Republican or Democrat—would have significantly underperformed compared to staying invested in the S&P 500 at all times.

Instead of trying to time the market, take a more holistic approach to investing. While elections can cause short-term market fluctuations, the market's long-term trajectory is influenced more by economic fundamentals than by political events. Focus on fundamentals and adding solid companies and funds to your portfolio regardless of who is in office. 

Diversification remains a key strategy to manage risk, especially during uncertain times like election seasons. A well-diversified portfolio can help cushion against sector-specific volatility that may arise due to anticipated policy changes. Invest in multiple sectors and diversified funds (like a total market index fund or S&P 500 index fund) to limit your risk of loss.  

Staying Steady When Markets Get Political

The turbulence of election years can bring massive shifts in investors’ portfolios, and if this volatility makes you nervous, you’re not alone.

While increased volatility during election season is normal, it’s important to remember that markets tend to bounce back after temporary dips. 

Long-term economic growth isn’t tied to a single political party or president—it’s about economic resilience, innovation and investor discipline. Focusing on the fundamentals, even during chaotic election seasons, is a smart choice for most long-term investors thanks to the principles of dollar-cost averaging. Avoid the temptation to time the market and don’t let politics alone drive your investment decisions for the best long-term results. 

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