Many investors are trying to determine what impact the presidential election will have on stocks. A look back at previous elections provides useful context.
Let's start with George W. Bush's victory in 2000. The S&P 500 fell 13% in 2001 and 23% in 2002. But it's hard to blame Bush.
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stocks were already falling in 2000 when the dot-com bubble began to burst. Bill Clinton caught the right end of the business cycle in 1993-2000, and Bush caught the wrong end.
But then Bush benefited from the inevitable economic rebound. His tax cuts helped boost it, although they also widened the budget deficit. The S&P 500 soared 26% in 2003 and continued to rise through 2008.
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Then came the financial crisis, which caused the index to fall 38% that year. Barack Obama was elected in November 2008 and initially his election meant little as the S&P 500 continued to sink through March.
But most experts agree that Obama and the Federal Reserve did an excellent job bringing the economy and financial system back from the brink.
The S&P 500 jumped 23% in 2009 and rose even further in five of Obama's remaining seven years.
The impact of Trump and Biden on stock market returns
The stock market's reaction to Donald Trump's 2016 election victory was quite interesting. Many experts thought he and his confusing approach to economic policy would hurt the market.
The stock fell on the night of Trump's election, but quickly recovered, rising 19% in 2017 and continuing that trend for two of the next three years. Trump's tax cuts and deregulatory policies helped boost the economy, although public debt soared.
Related: Stanley Druckenmiller Offers Bold Take on stocks and Elections
When Joe Biden won the 2020 election, Trump and some other conservatives predicted the stock market would crash. It wasn't like that. Biden's fiscal stimulus and monetary stimulus from the Federal Reserve helped propel the economy toward steady growth.
The stock market has recorded returns of over 20% in three of Biden's four years in office.
Presidents' policies do impact actions, but there are many other factors at play. Many experts maintain that the market is currently overvalued.
Stock valuations and history send signals
As of Oct. 18, the S&P 500 was trading at 21.9 times analysts' earnings estimates for the next 12 months, according to FactSet. That's well above the five-year average of 19.5 and the 10-year average of 18.1.
If stock prices fall as investors seek to bring the ratio closer to historical norms, it may not matter who is in the Oval Office.
Related: Veteran Fund Manager Says Strong Words About stock market
So what should we make of the Trump-Kamala Harris showdown? Given how close the race appears to be according to presidential polls, it may take days to determine the winner. The stock could seriously fall if that were the case.
Political instability may be the greatest danger investors ever face, especially when there is the threat of civil unrest. If you are a long-term investor, that could create buying opportunities for you.
BlackRock's view on elections and markets
The consensus is that Trump will be good for stocks, but Harris will not. But take it with a large grain of salt. It could be that Trump caused social unrest or that Harris was good for business.
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Jean Boivin, managing director of the BlackRock Investment Institute, says financial markets are not taking the threat of a disputed election seriously enough. (The Institute is the research arm of money management titan BlackRock.)
There could be “weeks of very disruptive legal battles” that will disrupt markets, he told Bloomberg.
“I don't think that's in the price. And if you want to prepare for some scenario where you need to react, I think that's one of those scenarios that could be bad for the markets.” But he advises against short-term trading around the election, calling it “nonsense.”
Related: Veteran Fund Manager Sees a World of Hurt for stocks
