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Yahoo U: How stocks perform around elections

Yahoo Finance’s Brian Cheung breaks down how stocks have historically performed around elections.

Video Transcript

BRIAN CHEUNG: Well, I do want to bring up that data again one more time. Again, we have a plethora of data from previous elections and markets to show you historically what has happened in different outcomes. So let's take a look at what it looks like when a Democratic president wins, versus a Republican outcome. So again, this is data from the Citi Private Bank via Haver, and you can see the Democratic outcomes on the average stock market return in that election year being lower for a Democratic president relative to a Republican president, about 9.5% in that election year.

But when you look at one year after election, that equation actually flips. So a Democratic president tends to have higher stock market gains in that year, about 14.3%, versus a Republican of only 1.5%. So not necessarily so clear there. And in fact, a clear way of looking at this might not be by party, but by whether or not the incumbent president wins the re-election.

So this shows those outcomes. So purple is an incumbent winning, versus light being the incumbent losing. And you can see that an incumbent winning the election is coinciding with stronger stock market increases in both the election year in addition to the year after election. That's by a mile over an incumbent losing in that election.

So from this standard, it does show that a Trump win may be in line with expectations for a higher returns. But of course, as we know, it's not just the presidential election that matters. We're also watching very closely the outcome of the Senate and the House races. So I want you to buckle in, because this next chart is going to be a little bit of a mess.

This data comes from Fidelity. And this measures broad market performance across several measures, which includes the S&P 500, the Dow Jones, and a few other things as well. And this shows you the growth in stocks across the 48 months or four years after an election, right, covering a whole administration.

And the red lines that you can see here, they cover the Republican leading outcomes, right? So a Republican winning the presidency, the Republicans sweeping both the House and the Senate, or the Republican winning the White House, but a divided Congress, with the Democrats winning either the Senate or the House. The blue lines are just the same outcomes but obviously, Democratic leaning.

And broadly speaking, I mean, any of these outcomes really result in pretty solid growth. And you can argue that at the end of each administration, at the end of each four years, the Republican outcomes tend to lead to slightly higher growth. But again, this is too noisy of a chart to really draw any solid conclusions. At any other point in time, especially in the earlier parts of an administration, it's not necessarily always the case that a Republican administration ends up having higher gains in the stock market than a Democratic one.

Now, another point that's really-- you can pull from here is the purple line shows you the all election outcome regardless of what party, it's basically, literally, exactly what the market does over a four year period. And it tends to go up. And why is that? Because stocks usually go up, as Sam Ro and Myles Udland here at Yahoo Finance tend to say. So that's really the greater conclusion here. It doesn't really matter what administration. Stocks have other elements that drive it up as well. And they do end up going green for most of the time.

Now, it's a separate question, something unique about this is-- especially this election-- is what if we get a contested election, right? And we only have one example of that, which is 2000. So here's the Dow Jones and the S&P 500 as a percentage of change relative to where the markets were trading before November 7th of 2020, years ago.

So again, election happened on the 7th. And that night, the networks they called Florida for Gore, and then they retracted it. They called it for Bush, and then they said it was too close to call. So at that point in time, we knew that we were really going to be in for a rough ride, as those legal battles really began.

So we know that it was the legal battle after legal battle until December 12th, which is when the Supreme Court had declared at the time that it was a 5-4 decision in the Supreme Court that Bush had won the election. So you can see that really, markets had sold off pretty, I won't say harshly, I guess, but 8% is a noticeable decline in the days following that November 7th election. But they did end up climbing back up in a way that you could argue maybe that wasn't even necessarily due to the contested election, but due to other factors at hand.

But regardless this type of volatility, where you can see a sell off of maybe even up to 8%, is something that market strategists are saying we might need to be prepared for, if there is a contested election after next Tuesday's results. There could be some safe haven running to gold or US treasuries, but he did say that volatility should fade over time. But of course, as we know, politics is only one element of the market, especially right now in the midst of this coronavirus. So it's important to note that it's not just those types of elements, it's many other factors as well. But again, worth mentioning that that volatility could be expected after next Tuesday.

- Hey, Brian. I've studied and pondered a lot of this type of data, and I've come to the conclusion that it's mostly just random outcomes we're talking about here. And I don't think there's any predictive power in this data along the lines that, if you're an investor, you can assume that if a Democrat gets elected, we're going to see higher returns in the stock market. I mean, one of the reasons is for Demo-- for any president to impose policies, the effect of those policies often lags for months or years.

So would you agree with that? Or would you take the side that maybe there is some predictive power here, and something investors can actually use?

BRIAN CHEUNG: Yeah, I do think that's a valid point, and I think I tried to illustrate that using the Fidelity data that showed you--

- Right--

BRIAN CHEUNG: -all the

- --you did.

BRIAN CHEUNG: --different colored lines. Either way, the market is going to generally tend to go up over a four year period. So I think that if you are trying to strategize, over the long term it probably doesn't do you much good to say well, depending on whether or not it's a president who's a Democrat or Republican, based on the mixture of who wins Congress.

I think what's more important is what is your investing timeline? If you're looking over a short period of time, you might be able to play to volatility, not of who wins the election, but of a contested election, as I mentioned with that sell off that we saw in 2000. But again I think a little bit of a fool's game to say I'm going to put my whole investing thesis behind who's going to win next Tuesday.