S&P 500's Past Performance During Presidential Elections

Key takeaways

• The S&P 500 has often correlated with the outcome of U.S. presidential elections.

• Markets tend to perform better when incumbents are reelected or a predictable candidate wins.

• While it serves as a historical indicator, the S&P 500’s movements during elections should not be taken as a definite predictor of results.

All About the S&P 500

The S&P 500 is one of the most prominent stock market indices, representing 500 of the largest publicly-traded companies in the U.S. It’s widely considered a barometer of the U.S. economy, as it reflects the performance of large-cap companies across various sectors.

The index's importance lies in its ability to give investors insight into the overall health of the stock market and the economy. From institutional investors to individual traders, the S&P 500 is a critical tool for measuring market performance, making it a key resource for economic analysis.

Historically, major economic and geopolitical events, such as recessions, wars, or policy shifts, have been mirrored in the S&P 500’s performance, reflecting its sensitivity to the broader economic landscape.

How the S&P 500 became a leading economic indicator

The S&P 500’s role as a leading economic indicator has developed over time, primarily due to its comprehensive coverage of the U.S. market. As it tracks the largest companies across various industries, it provides a real-time snapshot of corporate America’s financial health, which often foreshadows broader economic trends.

Initially, the S&P 500 was seen as a stock market measure, but its influence has grown as economists and policymakers have started using it to predict economic performance. Over the years, its movements have been studied alongside key economic data such as GDP growth, unemployment rates, and consumer spending, giving it the status of a leading economic indicator.

As the S&P 500’s reach and significance expanded, it has become central to analyzing everything from investor sentiment to fiscal policy impacts, influencing both short-term market expectations and long-term economic forecasts.

Other mainstream economic indicators

While the S&P 500 plays a critical role in gauging economic performance, several other mainstream indicators also offer valuable insights into the state of the economy:

1. Gross Domestic Product (GDP): Measures the total economic output of a country. A growing GDP indicates economic strength, while a decline signals contraction.

2. Unemployment rate: Tracks the percentage of the labor force that is unemployed but actively seeking work. It’s a key indicator of economic stability.

3. Consumer Price Index (CPI): A measure of inflation, CPI tracks the average price changes of goods and services over time.

4. Federal Reserve interest rates: The Fed’s interest rate decisions affect borrowing costs, consumer spending, and overall economic growth.

Past presidential elections and the S&P 500

The S&P 500’s performance has often correlated with the results of U.S. presidential elections, with many investors seeing it as an unofficial predictor. Historically, when the S&P 500 has posted gains in the months leading up to the election, the incumbent party tends to win. Conversely, market declines have often signaled a change in leadership. Let’s look at the S&P 500’s track record during recent presidential elections:

• 1980 (Reagan vs. Carter): The S&P 500 increased by 25.77% leading up to Reagan’s victory, coinciding with high inflation and economic uncertainty.

• 1984 (Reagan vs. Mondale): The S&P 500 surged 1.40%, amid strong economic growth, supporting Reagan's re-election.

• 1988 (Bush Sr. vs. Dukakis): The index rose 12.40%, reflecting a stable economy and contributing to Bush Sr.'s win.

• 1992 (Clinton vs. Bush Sr.): A strong economy buoyed the S&P 500, rising 4.46% in the election year, paving the way for Clinton’s win.

• 1996 (Clinton vs. Dole): The S&P 500 jumped 20.26%, benefiting from economic expansion, securing Clinton’s second term.

• 2000 (Bush Jr. vs. Gore): The S&P 500 dropped 10.14% as the dot-com bubble burst, leading to a controversial election result.

• 2004 (Bush Jr. vs. Kerry): A moderate rise of 8.99% helped Bush secure re-election in a relatively stable economy.

• 2008 (Obama vs. McCain): Amid the Great Recession, the S&P 500 fell 38.49%, reflecting the economic turmoil that shaped Obama’s victory.

• 2012 (Obama vs. Romney): The index gained 13.41%, highlighting recovery from the financial crisis, aiding Obama’s re-election.

• 2016 (Trump vs. Clinton): The S&P 500 rose 9.54% during the year, defying many predictions of market volatility from a Trump victory.

• 2020 (Biden vs. Trump): Despite pandemic-related uncertainties, the S&P 500 rose 16.26%, signaling optimism for economic recovery.

Source: Source: Macrotrends

Outliers in the S&P 500's returns during past presidential elections

While the S&P 500 has often aligned with presidential election outcomes, there have been outliers where market performance did not predict the winner accurately. For instance:

• 1956: President Eisenhower won re-election despite the S&P 500 falling by -3.2% in the three months before Election Day. His high 78% approval rating was attributed to record employment, high wages, and stable prices.

• 1968: Nixon narrowly defeated Vice President Hubert Humphrey, with a 0.7% margin of victory. This election featured three candidates, including Democrat George Wallace, who garnered 13.5% of the popular vote. The S&P 500 gained 6% leading up to the election.

• 1980: Reagan replaced Carter in an election shaped by a fresh oil crisis and 13.5% inflation, the highest since 1947. The stock market increased by 6.9% in the 90 days prior to the election.

• 2020: Following a brief pandemic-induced bear market, the S&P 500 returned 2.3% in the three months before Election Day. Despite this rebound, Trump's approval rating dipped below 30%, with unemployment reaching 8.4% and record voter turnout.

S&P 500 returns during non-presidential election years

In non-presidential election years, the S&P 500 has historically exhibited more stable growth compared to election years, which tend to introduce higher volatility due to political uncertainties and potential policy shifts. According to T. Rowe Price, since 1950, the S&P 500's average price return in non-election years has been approximately 11.6%, while it stands at 11% during presidential election years.

Analysts' commentary on the S&P 500  

Here’s an overview of analysts' perspectives on S&P 500 trends in both election and non-election years:

• Goldman Sachs suggests that economic conditions, such as inflation levels and central bank policies, often heavily impact S&P 500 performance, noting that these factors may sometimes overshadow the effects of political cycles.

• Charles Schwab explains that non-election years tend to experience fewer politically driven fluctuations owing economic fundamentals to play a more significant role. They highlight the impact of interest rate changes and global economic policies on market stability during these times.

• J.P. Morgan: Observes that S&P 500 trends rely more on fundamentals like earnings growth and economic stability beyond political events in non-election years.

Final thoughts: S&P trends on returns

While the S&P 500 has proven to be a useful indicator of market sentiment during U.S. presidential elections, it’s essential to remember that it’s not an infallible predictor of results. The index reflects broader economic conditions and investor sentiment, which can be influenced by many factors beyond the election itself.

As investors, it’s critical to approach election cycles with a balanced view, considering the S&P 500’s trends but not relying solely on them for decision-making. Platforms like moomoo offer tools to help investors track market movements and stay informed during such critical times. Whether trading on election-year trends or simply keeping an eye on market sentiment, having access to real-time insights can be invaluable for navigating uncertain times.

With historical trends in mind, investors can see that while the S&P 500 plays a role in understanding market reactions to elections, it should be considered as part of a broader investment strategy.