Q: 2020 is a U.S. presidential election year, so in the interest of preparing, how could the outcome affect the stock market?
First off, it's important to point out that nobody knows for sure how any political change will affect the stock market. You might recall that many experts were predicting a market collapse if Donald Trump was elected in 2016, and the exact opposite happened.
With that in mind, here are some statistics. In the average election year since 1900, the S&P 500 has gained 9.5%, which happens to be in line with the overall long-term average.
But what about Democrats vs. Republicans? Since 1928, Republicans have won 11 presidential elections. In those election years, the S&P 500 has averaged a total return of 15.3%. Democrats have won 12 times, with an average total return of 7.6% in those election years.
In a nutshell, the stock market typically goes up during an election year and there have been better results in years when a Republican was elected. However, there are many variables, such as who wins control of the House and Senate, whether the president is new or was reelected, and just how far to the right or left the specific president leans. It's also worth noting that in the year after an election -- the president's first full year in office -- the average S&P 500 return is just 3.4%.
The bottom line is that if you see a headline that reads "Stock Market Will Crash if Candidate X is Elected," or that calls for an immediate recession due to election results, take it with a big grain of salt. Although there's no way to predict post-election market performance with accuracy, history points toward positive market performance no matter who is in power, and there are many moving parts that can determine how things play out.