Election and Stock Returns

By: EBS Invests 

Recently, for better or for worse, the new president elect of the free world is Donald J. Trump, and speculation in the investing world remains: how will president elect Trump influence the stock market? Let us start off first by reminding ourselves that the stock market is a market where primary and secondary securities trade efficiently. The term efficiency in the markets represents the degree of how the market represents all available information. The hope of market efficiency is “if markets are efficient, then all information is already incorporated into prices, and so there is no way to "beat" the market because there are no undervalued or overvalued securities available.” 

I am going to share with you a graph that helps illustrate this point. As you can see below, once an investor hits 20 stocks, the risk of return is identical (within relatively) to holding 2,000+ stocks. This is because you get rid of company-specific risk. For example, if you owned 10 companies in your portfolio, each being 10%. If one fails, that will hinder your portfolio far more than holding 20 companies at 5% each. The reason many people fail to beat the S&P 500 is because they own far too many securities. The only return you will get from that is the market risk itself. That is why the S&P 500 is such a powerful tool and index that operates efficiently. It is because the S&P will always return how much risk the market is enduring, and that risk is always still constant. 

Remember to keep in mind with the graph above that “there is no return for taking company-specific risk.” Furthermore, keep in mind that owning 20 high tech stocks is not a diverse portfolio, as that does not divert company specific risk.

With a better understanding of how the markets factor in efficiency and information, the question stays: how will the newly elected president help or hinder the stock market? The short answer to this question is that the president has no direct influence on the stock market. The stock market will continue to increase over the long term, and no political party has had significant control over which the market returns. 

However, “Since 1957, the S&P 500 has achieved a median one-year return of 12.9% under Democratic presidents and a median one-year return of 9.9% under Republican presidents” (Jennewine, 2024). So therefore, there is a difference, but you must consider macroeconomic factors, current world affairs, and the Federal Reserve's current actions when taking in these statistics. 

As seen below, every president in the 21st century is listed, and they all perform similarly when generating stock market returns. The only outlier is George W. Bush, who led the market astray but also delt with the 2001 crash and 2008 financial crisis. 

“Research from Goldman Sachs shows that investing in the S&P 500 only during Republican or Democratic presidencies would have resulted in major shortfalls versus investing in the index regardless of the political party in power. 

With the 2024 election [now over], both presidential candidates may claim to be better for the stock market. They may even back their claims with data. But investors should ignore such comments. Statistics can be manipulated to fit different agendas, and stock prices are governed by macroeconomic factors beyond the control of any political party” (Jennewine, 2024).

Therefore, the short answer to the question of, with Donald Trump in power, will I see higher stock market returns? The answer is yes. However, I say yes, as the market will always eventually go up regardless of who is in the office. I personally think that with Trump's plan to deregulate businesses, making it easier to grow, small caps will see above-nominal growth. However, with the idea of tariffs, it could really hinder the economy and especially the industrial sector. Furthermore, 4 years from now, the average return of the S&P 500 will be on par to all past presidents, as that is what the market risk returns. 

Consider supporting me in these ways:

A lot of work needs to be done to create high-quality content for my readers. Roughly I spend 10–15 hours per newsletter researching, composing, and analyzing. To help support me, consider the following:

• Affiliate link: https://www.beehiiv.com?via=Bailey-Erwin

  ^{I get 50% of revenue via commission if you sign up for a paid newsletter plan via this link!}

• Share the newsletter with all your friends, co-workers, and/or people of interest!

• Want your work shared? I am seeking sponsors and/or marketing deals. Email me:

[email protected]

Want to Read Past Editions? Click Below:

Have a question or comment? Email me:

[email protected]

//See you in the next edition

EBS Invests est 2023//

NOT A FINANCIAL ADVISOR.

**The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on our site constitutes a solicitation, recommendation, endorsement, or offer by EBS Invests (Investments) or any third party provided to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such an offer would be unlawful under the securities laws or such jurisdiction.

There are risks associated with investing in securities. Investing in stocks, bonds, ETFs, mutual funds all involve a risk of loss. **