How Presidential Elections Historically Impact the Value of Your Business

As the U.S. presidential election approaches, the political discourse is intensifying, and its potential impact on the markets and business landscape is a pressing concern for investors and business owners.

Election periods often introduce short-term market volatility, driven by heightened anxiety and uncertainty as Election Day nears. Historically, the CBOE Volatility Index (VIX), commonly known as the Wall Street “fear gauge,” tends to experience notable increases approximately two months before the election. 

However, this volatility generally diminishes within 30 days post-election and returns to normal levels approximately 60 days thereafter. Furthermore, the year leading up to an election typically witnesses reduced market returns due to investor uncertainty. Conversely, the 12 months following an election often show stronger market performance, irrespective of the party in power. Specifically, when a new party assumes the presidency, average stock market returns tend to be around 5%. In contrast, if the incumbent president is re-elected or the same party retains the presidency, returns average slightly higher at 6.5%.

For small businesses that are not publicly traded, the impacts of elections can be more challenging to discern. Nevertheless, many businesses are already grappling with the effects of inflation, interest rates, and overall market volatility. It is crucial for business owners to recognize that the maturity risk and systematic risk associated with investing in small businesses are integral to determining the appropriate cost of capital (P/E or valuation “multiple”). For instance, a decrease in a business’s risk profile from a multiple of 5x to 4x can significantly affect the owner’s net worth.

Additionally, the upcoming elections will likely bring renewed focus to the Tax Cuts and Jobs Act (TCJA), particularly regarding its provisions set to expire at the end of 2025. With ongoing discussions about the future of these provisions, both individuals and businesses should prepare for potential legislative debates next year concerning whether to extend or amend the current tax laws.