On Tuesday, November 5^th, 2024, the US Presidential Election will happen. And that sentence is perhaps the only one that can be written before the discussion becomes partisan, irrational, or unhinged.

“Unhinged” and “irrational” are not words associated with good investment decisions, so we’re going to ignore the politics and just look at the numbers. What are the historical returns of the S&P500 around presidential elections?

Using historical data from Bloomberg from 1952 until this year, we tested what happened if you had held the S&P 500 from one week before the election to one week after. The annualized return was 30.8% as opposed to an unconditional compound annual growth rate (CAGR) of 11.8% (and for those of you who just can’t be non-partisan for the time it takes to read 500 words, when Republicans won the return was 29.9% and when Democrats won it was 31.3%). So, (because 30.8 is bigger than 11.8) it seems like a good idea to be long over elections.

These numbers tell you what has happened in the past. That is indisputable. But do they give any guidance as to what will happen in the future? The answer to that is almost certainly “no”. The first reason for this should probably be obvious: small sample size. Our sample only includes 18 elections. And these 18 instances were spread over 72 years. Hopefully, you won’t need any statistical tests to confirm that the results are almost meaningless.

In some cases, the ties between the market and the catalyst will be so plausible that a small sample might be worth believing no matter what the t-statistic is. An example would be that the VIX drops after the FOMC announcement. We don’t have much data for this event either, but we have huge amounts of evidence that implied volatility drops after an event with certain timing and an uncertain outcome. For example, we have thousands of equity earnings announcements every year which tell that story. So, betting that the VIX drops after the election seems like a good trade.

But do we have such confidence that the elections influence the stock market itself? In statistical terms, what is our base-rate here?

First, we look at what happens during mid-term elections. The results for these are even better than for the presidential elections. Holding for the two weeks around mid-terms give an annualized return of 52%. The fact that this is larger is puzzling. The presidential years also have house and senate races. So why would adding the presidential election reduce an election effect?

But it is what happens in the odd years, when there is no election, that is most interesting. Holding over the period that would have had the election gives an annualized return of 26%. It isn’t the elections that give an interesting result, it is the fact that early November has been an anomalously good time to invest. And this really is a mystery. Or most probably, just luck.

“Elections are probably meaningless with respect to investing in the market” seems like a very nihilistic conclusion. And it would be, if your trading strategy consisted only of this idea. But even the smallest effect can be used in a kitchen sink model. A good weighting scheme will give the effect the contribution it deserves. Enough marginal effects add up. And that is real democracy.

Disclaimer

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting, or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact HTAA or consult with the professional advisor of their choosing.

Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.