Beyond the Ballot: What Really Drives Stock Market Performance

With the 60th U.S. election just days away, the media’s hyper-focus continues to grow as we await the result. Clients and investors naturally become cautious as experts in the financial media make bold predictions about the market and economy based on potential election permutations. Yet, it’s essential for investors to remember that market movements are influenced far more than by whom occupies the White House. Economic fundamentals such as inflation, interest rates, GDP, unemployment rate, and business investment, are just a few examples of the countless variables that shape the market daily. These factors are far more pivotal in driving long-term market performance than those who control the White House.  

The U.S. President certainly plays an important role, and their policies may impact markets, but historical data shows no clear link between which party is in power and stock market returns. From Eisenhower's presidency (1957) onward, we can determine there is no trend of outperformance tied to one political party. Democratic presidents recorded a median annual return of 12.9%, whilst Republican presidents notched a higher compounded annual return of 10.2%. In fact, both returns are relatively close to the market’s long-term 10% average, emphasizing that political cycles have not been the primary drivers of market returns over time.

When we invest, we focus on businesses: high-performing companies with a record of producing consistent results. We are not investing in a politician, or in the party controlling the White House. Company success, economic growth and market dynamics are driven by factors that extend far beyond any single political term. After all, the stock market is a global information processing machine that constantly digests new information, and, over time, rewards top-performing companies and long-term investors.

Time in the market is the most important ingredient for generating consistent positive market returns. When we structure a portfolio, we tailor it to an investor’s risk tolerance and investment horizon, ensuring a balance of growth-oriented assets and defensive elements for stability. This approach not only helps manage market downturns but also keeps us prepared for the unpredictable — as seen in events like COVID-19, which no one could have anticipated in late 2019.

In 2024 alone, there are 74 other national elections, affecting over 60% of the global population. While the U.S. presidential election is the most influential election, it’s just one of many factors that affect global markets. Our role is to help clients focus on what they can control, an investment strategy tailored to their needs, with a long-term perspective. Ultimately, the key to success is to invest for the long term.

Sources: Dimensional Fund Advisors, The Motley Fool