Markets And Presidential Elections
by Frederick R. MacLean

“We will win an election when all the seats in the House and Senate and the chair behind the desk in the Oval Office and the whole bench of the Supreme Court are filled with people who wish they weren’t there.”

P. J. O’Rourke

The presidential election campaign is now in full swing. As the candidates exchange insults and the comedians and talk show hosts gleefully join in the free-for-all, we are invariably asked our opinion on what the stock market will do if one candidate or the other wins.

As with any unknown outcome, the impact of the presidential election on the market is impossible to predict. However, two things are certain: some investors will be convinced that the market cannot possibly do well if their candidate loses, and there will be a general consensus that somehow it is substantially “different” this time. We have been hearing and writing about these same issues every four years for as long as we can remember. Our experience tells us that no matter what the election outcome is, the capital markets will survive and, at least in that regard, it is not all that different this time.


It is easy to believe that political polarization and vitriol are at an all-time high for this elect-ion and, with some justification. Social media has likely encouraged more extreme partisanship in recent years, and in some instances the usual insults and lies have been replaced by riots and legal attacks. However, the culture of opponent-bashing, the willingness to win at all costs, and the fear of imminent catastrophe if the other party prevails are nothing new. In fact, they are embedded in our election cycles and as old as American democracy itself. For example:

John Adams on George Washington: “That Washington was not a scholar is certain. That he was too illiterate, unlearned, unread for his station and reputation is equally past dispute.”

Davey Crocket on Martin van Buren: “(he) is laced up in corsets, such as women in town wear, and, if possible, tighter than the best of them.”

Teddy Roosevelt’s characterization of Benjamin Harrison: “A cold-blooded, narrow-minded, prejudiced, obstinate, timid, old, psalm sing-ing Indianapolis politician.”

Warren Harding (a publisher at the time) on Teddy Roosevelt: “Selfish, intolerant, unstable, violently headstrong, vain, and insatiably ambitious of power.”

President Harry S. Truman on General Dwight D.  Eisenhower: “The General doesn’t know any more about politics than a pig knows about Sunday.”

As you can see, slanderous name-calling and misinformation have a long history in our democratic process. This is unfortunate and even embarrassing at times, but it is not new. Granted, the methods of partisan defamation have escalated, and social media has amplified the fury, but the bad intentions are the same as they have always been.


Politics is inherently emotional; the day after the election, more than 40% of voters will be frustrated – if not disgusted – by the result. But regardless of our party affiliation, we all have a right to be frustrated now. Too many of our elected officials appear to be more interested in holding on to power or pleasing special interests than they are in doing the hard work necessary to create meaningful, positive change. Again, this is nothing new. It is tempting to think there is little hope for economic growth in such a toxic political environment, yet as we have seen over many election cycles, capitalism finds a way.

Heritage has been in business since 1993, so this is our eighth presidential election. In each of the prior seven elections, we have heard that “it’s different this time” or “it has never been this bad.” Over the prior seven elections, Democrats won four times and Republicans won three times, and the U.S. stock market was positive in the year after the election six out of the seven times – with an average annual return of over 19%. Granted, seven elections is a small sample size. But looking at the data going back to the election of 1928 (Hoover vs. Smith), there have been 24 elections and the average return of the market in the year after the election was 11%, which is not significantly different from the long-term average market return.

The truth is that corporate earnings – not the identity of the president – ultimately determine the long-term return of the stock market. Corporate earnings are the primary driver of stock market performance, and those earnings are determined by a number of factors, including inflation, interest rates, economic growth, productivity growth, technology, foreign affairs, the unpredictable preferences of the investing public and, yes, domestic elections. But these corporations do not sit idly by, allowing themselves to be cast to and fro by forces beyond their control, hoping it all works out for the best. Instead, they proactively adapt their strategies in response to the current environment and maximize the available opportunities. They find a way.


To be clear: We are not saying the election does not matter. Of course it matters. But on the day after the election, regardless of who wins, we predict the sun will rise, we will all go back to our regular daily lives, and corporations will adjust their strategies to maximize their opportunities for whatever environment presents itself over the next four years. We expect the market as a whole to adapt and overcome. Some companies will fare better than others, but the details are unknown. The best strategy, therefore, is to prepare rather than predict; the best way to prepare is to ensure that you own all the corporate winners by holding a diversified equity portfolio as well as some bonds to help you weather the storms that invariably surface during every presidency. However, here is one prediction we are willing to make: Four years from now, we will once more be told “it’s different this time,” and we will write about this same subject again.