Despite the political tensions, historical stock market returns under presidents are surprisingly consistent. The research shows that the long-term performance of the market depends more on economic conditions than on the political affiliation of the president. What can investors expect and how to prepare?
At each presidential term in USA investors' expectations rise, as they believe that the president can significantly influence the functioning of the economy and the stock markets. But the truth is more complicated. Historical data shows that stock markets achieve their highest returns during a politically divided Congress, regardless of the president. This gives investors stability and security, which often leads to higher returns. However, can we really expect positive returns based on political calculations alone?
Politics on the stock market: an illusion of influence or a real guide for investments?
Every US presidential election season brings forth a plethora of theories and investment advice based on the political affiliation of the presidential candidates. Investors often believe that stocks of companies that favor the winning party will achieve better returns. But as history shows, these calculations are often wrong.
According to the research of the investment platform The Motley Fool since 1957, Republican presidents have averaged slightly higher annual stock market returns (10.2 %) than Democrats (9.3 %). But when we look at the whole context, it becomes clear that the political affiliation of the president is not the main factor in the performance of stock markets. Investors see their best returns under a president with a divided Congress—that is, when the president and one of the legislative houses belong to different parties. In this case, the average annual return is 13.7 %.
Why does a divided Congress bring higher returns?
Political divisions in Congress create obstacles to the passage of legislation, reducing the likelihood of large-scale policy change. Stock markets love stability – when companies can anticipate future regulatory moves and potential changes, a decline in financial uncertainty usually shows up in the form of higher returns. Businesses are less likely to see laws passed under a divided Congress that would introduce major changes in areas such as tax laws, the labor market or environmental rules. Such political division thus gives companies a sense of security and encourages investors to invest with the expectation of a stable environment.
On the other hand, in cases where one party controls both the White House and both houses of Congress, the potential for sweeping legislative changes increases, creating uncertainty. Uncertainty, however, tends to lead investors to more defensive investments such as government bonds or gold, reducing capital inflows into the stock market.
Democratic companies? Republican companies? Yield depends on stability, not affiliation
Although big tech companies like Apple, Google, and Microsoft mostly financially support Democratic candidates, those companies have often made high returns even under Republican administrations. Why? Technology companies have most of their revenue in the global market, which means they are less affected by short-term political changes in the US. In addition, due to their innovative character, technology companies are flexible and can adapt more quickly to possible new regulations.
Recent research shows that companies that contribute to both parties are often more profitable than those that financially support just one. This may mean that companies that maintain neutrality create greater opportunities for long-term growth, as they are less exposed to ideological risks and unexpected regulatory changes.
The best time to invest - don't wait for the election
Many studies of investing performance show that investors who stayed in the market throughout a president's term achieved better returns than those who moved in and out based on the election. An analysis of the past 23 election cycles reveals that the most successful strategy is long-term patience – without relying too much on political predictions.
For example, if we invested according to the principle of "waiting for political stability", we would lose many opportunities for growth. According to the research data, it has been shown that returns stabilize over time and that political affiliation in itself does not have a key influence. Indeed, investors can achieve the best results by investing regularly and persistently throughout a president's term.
How will Trump's new term affect?
If re-elected, Donald Trump would likely maintain low capital gains and income tax rates, benefiting the wealthiest investors and companies, according to the latest data. In addition, he announced the possibility of additional tax breaks for companies that manufacture in the US, which could bring higher returns to domestic manufacturers and investors focused on the domestic economy.
But investors should be careful with their expectations. History shows that large-scale tax cuts rarely lead to greater economic growth. Instead, they often lead to an increase in public debt and a potential rise in inflation, which could weaken stock market returns in the long term.
Conclusion: Focus on long-term stability, not political promises
Like many political changes, presidential politics often does not bring quick fixes or sudden returns. Over the long term, the data show, stock markets tend to follow broader economic trends, regardless of political cycles. The best investment strategy remains constant, deliberate and diversified investing, regardless of who occupies the presidential chair.
Although the political situation is always unpredictable, investors should not overestimate the short-term political impacts. Instead, you should keep your focus on your long-term goals while monitoring the key economic indicators and factors that really affect the markets.
