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Stocks usually go up

Myles Udland
·Markets Reporter
·3-min read

Thursday, January 21, 2021

An earlier version of this article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

No matter who is president of the United States.

On Wednesday, Joe Biden was sworn in as the 46th president of the United States.

Also on Wednesday: all three major U.S. stock market indexes closed at record highs.

And as happens before, during, and after any presidential election cycle, investors have recently been bombarded with data about how stocks perform under all varieties of government control situations.

Citing work from BMO, my colleague Brian Sozzi wrote Wednesday that stocks have tended to perform better under Democratic presidents than Republican presidents.

On average, the S&P 500 (^GSPC) has risen 10.4% per year when a Democrat occupies the White House against an average gain of 6.6% during years in which a Republican is the sitting president. Data from CFRA shows that in years when Democrats control both the White House and both chambers of Congress — as will be the case for at least the next two years — the S&P 500’s average gain has been 9.8%.

Stocks go up no matter which party the President represents, though Democratic presidents do tend to be better for stocks than Republicans. (Source: CFRA)
Stocks go up no matter which party the President represents, though Democratic presidents do tend to be better for stocks than Republicans. (Source: CFRA)

A guiding principle for writing and thinking about the stock market here at the Morning Brief is to reiterate, over and over, that stocks tend to go up over time.

This does not mean stocks always go up or only go up.

But it does mean that more interesting and fruitful discussions about markets will be had when the central question shifts from why stocks might go down to why they keep going up.

As this chart from JPMorgan’s quarterly guide to the markets shows, in most years the S&P 500 declines at least 10% from its intra-year peak. Many years include a drop of 15% or more.

Most years see a market decline of more than 10% from peak to trough. But in more than three-quarters of years the stock market finishes the year higher than where it began. (Source: JP Morgan Asset Management)
Most years see a market decline of more than 10% from peak to trough. But in more than three-quarters of years the stock market finishes the year higher than where it began. (Source: JP Morgan Asset Management)

The takeaway from this chart, however, is not to try and avoid these selloffs but to realize they come with the territory of investing in the stock market. And that in most of these years the market nevertheless finishes higher.

Each year, Yahoo Finance keeps track of the annual S&P 500 price targets published by Wall Street strategists. This exercise is often ridiculed by many in the investment world who believe they sound sage and wise by stating that no one can know the future.

These forecasts, however, are not meant to be predictive but prescriptive, a detailed map of the biggest forces in financial markets as they stand at the start of a new year.

And because any basic overview of the predominant long-term trend in the U.S. stock market would identify that stocks tend to go up, these strategists often reach the same conclusion.

Market history is also clear — the burden of proof lies with those who argue stocks should not or will not go up in a given year.

And this burden is even higher if one chooses to argue that a given four-year period (read: presidential term) will be a negative time for the stock market.

By Myles Udland, a reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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