Voting your conscience might affect money markets but perhaps not in the way many people think.

Conventional wisdom holds that stock markets drop when a left-leaning head of state wins office. The idea is that progressive reforms for more social and economic equality increase public spending, and tighter restrictions might stymie corporation growth.

So markets should rally if a right-leaning president or prime minister takes office because of the right’s reliance on free market capitalism and lower taxes to spur economic growth. 

However, history shows that a rise in the stock market after a change in government depends more on a lack of political restraints on the incoming leader so that the new government is free to enact its preferred policies. 

That doesn’t seem to be happening now. In contrast, infighting in legislative bodies and congresses has become the norm.

Bob French, a chartered financial analyst at Retirementresearcher.com analyzed returns for the U.S. stock market — the world’s largest — after 23 U.S. presidential elections from 1926 to 2023. As a measurement he used the S&P 500 index, which is a way to measure the overall market by looking at 500 leading companies. Over that time period, the S&P grew by an average of 12.16%. 

Then he broke it down to see if it differed depending on what political party was in power and found that under a Republican president it was 9.32% and with a Democratic president, the S&P 500 growth averaged 14.78%. 

But French noted that while there is a statistically significant gap in market gains between a Democrat president vs. a Republican president, he believes the Democrats presided when the world overall was doing better rather than when Republican presidents were in office.

How well a stock market fares depends on the status of the economy, the outlook for corporate earnings and geopolitical conflicts.

French directs investment analysis at Retirement Researcher and investment analysis at Virginia-based McLean Asset Management. I asked him about what really matters during presidential election cycles.

Q: What should investors focus on during presidential election years?

French: With the stock exchange, who you choose to vote for is very unlikely to have a meaningful impact for future returns because the market knows that for the U.S., a Democratic president there will be a higher stock market return, and for a Republican it will be lower (increase). 

That is already priced in and how it evolves depends on what happens. If [U.S. Democratic presidential candidate Kamala] Harris pulls ahead, the market will react. Also for congressional elections and every election in the world. Markets constantly react to what is going on with the available information. 

 Q: Should people reallocate their investments based on whether a left- or right-leaning head of state takes over?

French: No. The reason is portfolios should be invested for the long term for literal decades. Don’t try to outguess the market. If you think, hey, the Democrats would support green industries, others will have the same thoughts.

Q: Why are markets more volatile during elections?

French: Markets move on new information, things happen. The unexpected and expected get priced in. Elections are information-spewing machines. There is new information constantly. When markets move, volatile markets are adapting to what is happening in the world and looking for the correct price for that stock. There is so much information, new polling, etc. and providing what will likely happen to go forward and that drives prices. Big informational events are a period of time we should see higher levels of volatility.

Predicting the future

Finally, I asked French how he expected markets to perform over the next year and whether that would depend on the winner of the election. He declined to make a forecast and said that “historical rates of return and interest rates” have more of an effect on the market.

“I have a more confident expectation for the next decade or lifetime based on historical returns,” he said. “ There’s too much noise in the system to be able to estimate the rate of return on the next year.”

So what does all this mean for voters? French had this to say: “Focus on actual issues, what matters to you.”

Questions to consider:

1. What does the stock market pay more attention to rather than who runs the country?
2. If you were to invest money based on whether a left- or right-leaning leader takes over, which industries do you think would do better or worse? For example, oil companies, solar companies and banks.
3. Why are markets more volatile during elections?