The stage is set for a potential rerun of the 2020 election this November and many investors are aware that financial markets usually do well in a presidential election year. Election years present a unique dynamic since the normal market influences are in play plus factors related to the election.
In a U.S. presidential election year the S&P 500 has demonstrated positive returns 83% of the time with the Dow Jones Industrial Average (Dow) and Nasdaq following close behind.
The 10 Year Treasury has 10 presidential election year observations and has shown positive returns 90% of the time.
Of course, market returns tend to be positive about 70% of the time for any given year.1
Let’s dive into the returns themselves.
A Closer Look at Historical Returns:
| All Years Average Return | Presidential Election Years Average Return | |
| S&P 500 | 8% | 11.6% |
| DJIA | 7% | 9.1% |
| NASDAQ | 13% | 9.3% |
| 10 Year Treasury | 7% | 8.1% |
The stock market’s long-term average annual return has oscillated between 7-8% for heavyweights like the S&P 500 and the Dow. However, presidential election years have produced a bit more excitement with a higher average of 11.6% for the S&P 500 and 9.1% for the Dow.
This uplift isn't just confined to stocks; almost four decades of data hint that bonds in the 10-year treasury market also tend to flourish, making it a potentially fruitful year for a broad spectrum of investors.
What's Behind the Election Year Phenomenon?
Election year returns do not happen in a vacuum, other market factors are at play, however, as demonstrated, there are notable differences in returns between presidential election years and non-election years. What makes an election year so electric for financial markets?
The performance of the economy is often a critical pillar of a politician’s pitch, and perhaps with that comes some optimism (from both sides) that they see a brighter future ahead, helping fuel return across equities and fixed income.
While the historical data paints an upbeat picture of election years, it’s crucial for investors to tread cautiously. As shown, the broad ranges for minimum and maximum returns signal volatility, and external factors—both domestic and international—can significantly influence market performance. Hence, while the election year phenomenon provides an interesting backdrop for investment strategy, it should not be the sole factor guiding investment decisions.
Index Definitions and sources:
The S&P 500 Total Return Index (S&P 500), is a market-capitalization weighted index of the 500 largest U.S. publicly traded companies.
The Nasdaq Composite (Nasdaq) is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange.
The Dow Jones Industrial Average (DJIA) is a price-weighted index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange and the Nasdaq.
The 10 Year Treasury is represented by the Bloomberg US Treasury Bellwethers 10 Year Total Return Index that measures the on-the-run (most recently auctioned) U.S. Treasury bond with 10 years’ maturity.
1 https://www.nerdwallet.com/article/investing/average-stock-market-return