Why Election Years tend to be bullish

Let's discuss one phenomena that only happens every four years: Trading Around Election Year Results.

Typically investors and traders are tasked with keeping emotions out of the markets. Ben Graham highlights this in great detail in his book, the Intelligent Investor. However everyone has some political bias. Whether your candidate wins or loses, your portfolio allocation will dependent on the next four years. If not, you find a financial advisor or at least speak with one now.

You see, the biggest investing implication tends to be around taxes. Smart money is looking for the impacts on long-term capital gains, tariffs and estate planning. Dumb money is asking about changes in social policy and free money government grants.

Usually I avoid politics and elections because it is a lot of noise. But friends and investors do tend to message me about trading around election year results. So I share one phenomenon I studied in college by accident. During an election year, the S&P 500 tends to end the year in the green, more often than not.

The S&P 500's Performance in Election Years

Historically, the S&P 500 has tended to perform well in U.S. presidential election years. While there have been exceptions, the market has often seen positive returns during these periods.

Year-to-date, the S&P 500 is up 23% in 2024. This is fantastic for investors. In fact, the S&P is up 95% over the five years. Even during a pandemic, wars, and high inflation, investors have made out very well. This is excellent.

However we are reaching a turning point in a few weeks. First, a lot of money is involved in politics because the election outcomes are essential. Both parties have strong, opposing viewpoints on how to run the country.

For example, Kamala wants to offer tax credits and subsidies for small businesses. While Trump wants to increase tariffs and tax foreign trade. Each will have an impact on the economy. But the problem is when we don't know when and by how much. Which is why portfolio allocation is essential during election years. Do you want to rollover gains or sell before year-end? Let's dive into a few charts to discuss.

How to Analyze the S&P Index Returns

I searched for a few studies from different firms for this article. Some have opposing views but general consensus is that the S&P 500 tends to close up, not down in an election year.

For example, First Trust shows that a Republican victory is very good for investors. This is probably because investors favor tax cuts and the such. If a Democratic wins, the market closes up but not as much. Either way it is a positive close.

Again, chances are your portfolio is safe. The question you need to ask is, "how much more upside does the S&P have left for the year?" This momentum question is important ask right now. Right before the actual election.

Two episodes will happen before and after an election. In both scenarios, investors will experience portfolio volatility. I found this UBS/Capital Group deck online which has great charts explaining different election year results.

So volatility is real and rising but the year will still end strong. However, I have noticed in the past that the Sept-Oct period tends to dip. The chart below shows average returns but it is still worth observing.

It's hard to attribute why this happens. My best guess is that investors are cycling out of specific names and sectors during the post-summer session. The fall season is active trading period, right before Thanksgiving every year. This selloff seems natural and is also why investors probably buy in at the latter half of the year.

The reality is that we don't know how the S&P will end the year. It's already up 23% YTD. Maybe it'll go up 2-3% in November and December. The historical average returns suggest it will. However, I know investors are nervous with both parties as usual. Which means, if you are sophisticated enough, hedging the downside with index put options might be a good bet.

Why Index Put options? Well, investors can buy puts on the S&P at a specific strike price and lock-in gains for the next sixty days. This is a cheap way to insure against a downturn. You'll also lock-in your taxable gains at the current return, minus the cost of buying puts. It'll probably cost 1-2% at most, but will also help the average investor sleep at night.

Of course, if you don't trade options, don't do this. Speak to a financial advisor or do nothing. Either way, election years are a net positive for investors. So sit back and enjoy the returns.