Ever watch those cable news segments where they show a chart of the stock market starting exactly on January 20th? They call it the S&P 500 indexed to inauguration day, and honestly, it’s one of the most effective ways to tell whatever story you want to tell about a President, regardless of what's actually happening in the economy. It's a neat trick. By setting the "index" value to 100 or 0 on the day the oath is taken, you can track the percentage gain or loss with surgical precision.
But here is the thing. Markets don't actually wait for the parade to end.
The S&P 500 is a forward-looking machine. It prices in expectations months before a hand ever touches a Bible. When you look at the S&P 500 indexed to inauguration day, you're often looking at the "aftermath" of the market's initial reaction to the election results themselves. If the market rallied 10% between November and January because it liked the incoming administration’s tax policy, that entire gain is "chopped off" the chart. The new President starts at zero. On the flip side, if the market crashed during the transition, the new President starts at the bottom of a hole, making their subsequent "recovery" look much more impressive on a percentage basis.
The Problem with Starting the Clock on January 20th
Wall Street traders usually have their bets placed long before the Chief Justice shows up. Look at the transition from 2020 into 2021. The market was already ripping higher on vaccine news and stimulus hopes. If you only look at the S&P 500 indexed to inauguration day for Joe Biden, you miss the massive "reopening trade" that happened in the months prior. It’s the same story with Donald Trump in 2016; the "Trump Trade" began the morning after the election, not on January 20, 2017.
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When we index to a specific date, we create an artificial "Year Zero."
It’s kinda like judging a marathon runner but only starting the stopwatch at the 10-mile mark. It tells you how they did in the second half, but it ignores the fact that they might have been sprinting or limping to get to that point. Economists like Robert Shiller have often pointed out that market cycles and presidential cycles rarely align perfectly. Factors like the Federal Reserve’s interest rate decisions or global supply chain shocks don't care who is sitting in the Oval Office. They happen on their own timeline.
Historic Volatility and the Inaugural Baseline
Let's get into some real numbers. If you look at the S&P 500 indexed to inauguration day for Barack Obama in 2009, the chart looks terrifying at first. The market didn't bottom out until March 2009, nearly two months after he took office. Because the index started on January 20th, the chart shows a sharp immediate drop. Was that "his" drop? Probably not. It was the tail end of the Great Financial Crisis that started under the previous administration. However, because the baseline was set on Inauguration Day, the subsequent 200%+ rally over his two terms looked even more vertical because it started from such a depressed level shortly after the indexing began.
Contrast that with George W. Bush in 2001. He walked right into the bursting of the Dot-com bubble. The S&P 500 was already sliding, but the "inauguration index" makes it look like the market hit a wall the moment he was sworn in.
The reality is nuanced.
Investors use this specific indexing method because it provides a "clean" scorecard for policy changes. When a President signs an executive order or a major tax bill, you want to see how the market reacts relative to the day they gained the power to do so. It’s a measure of realized power versus anticipated power.
Why the 100-Day Marker is a Psychological Trap
We love round numbers. The "First 100 Days" is a benchmark created during FDR’s time, and the financial media has obsessed over it ever since. When tracking the S&P 500 indexed to inauguration day, the 100-day mark is often the first "status report."
But 100 days is nothing in the world of investing. It’s noise.
Think about the 2020 inauguration. The market was grappling with record-high valuations and a massive shift in tech spending. If you judged the administration based on the index at day 100, you saw a very different picture than you did at day 500 when inflation started to bite. Indexing allows us to compare "Apples to Apples" across different eras—for example, comparing how Reagan’s first year looked against Clinton’s—but it completely ignores the starting P/E (Price-to-Earnings) ratio of the market.
Starting an index when the S&P 500 is trading at a P/E of 30 is a lot harder than starting when it's at 12.
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The Fed Factor: The Real Driver Behind the Index
You cannot talk about the stock market performance since any Inauguration Day without talking about the Federal Reserve. They are the ones actually pulling the levers on the money supply.
A President can propose a budget, but the Fed decides the cost of borrowing. If the S&P 500 indexed to inauguration day shows a massive spike, you should check what the Fed Funds Rate was doing at the same time. During the post-2020 period, the index was heavily supported by near-zero interest rates and quantitative easing. When those rates started climbing in 2022, the index for the current term took a massive hit. It wasn't just about fiscal policy; it was about the cost of capital.
The index is a reflection of three things:
- Fiscal policy (taxing and spending).
- Monetary policy (interest rates).
- Global sentiment (wars, pandemics, oil prices).
The President only has direct control over the first one. Yet, the S&P 500 indexed to inauguration day is often treated as a singular grade for the person in the White House. It’s a bit of an oversimplification, don't you think?
How to Use This Data Without Getting Fooled
If you're looking at a chart of the S&P 500 indexed to inauguration day, do these three things:
First, look at the six months prior to the inauguration. This tells you if the market was already on a trajectory that the new President just happened to inherit.
Second, check the sector performance. Often, a President’s specific policies will boost one sector (like Energy or Tech) while hurting another. The "S&P 500" is an aggregate of 500 companies. Sometimes the index stays flat because Big Tech is crashing while Energy is soaring. The index hides the internal rotation of the market.
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Third, adjust for inflation. A 10% gain in the S&P 500 doesn't mean much if inflation was 9% over the same period. This is a huge mistake people make when comparing modern presidents to those from the 1970s or 80s. Real returns—what you actually get to keep in purchasing power—are what matter.
Final Insights for the Modern Investor
The S&P 500 indexed to inauguration day is a useful tool for political scientists and historians, but for an actual investor, it's mostly a distraction. Your portfolio doesn't care about the four-year cycle as much as it cares about the twenty-year cycle. Using a specific date in January as your "Point A" is arbitrary.
The market is a chaotic system influenced by millions of people making billions of decisions every day. One person in Washington has an impact, sure, but they aren't the only ones on the field.
Actionable Steps for Navigating "Political" Markets:
- Ignore the "First 100 Days" Hype: Don't make drastic portfolio changes based on short-term index performance early in a term. The real economic impact of legislation usually takes 12 to 18 months to show up in corporate earnings.
- Watch the VIX, Not Just the Index: Volatility (the VIX) often spikes around inaugurations as the market tries to guess what the new "rules of the game" will be. Use this volatility to rebalance your portfolio rather than panic selling.
- Focus on the "Policy, Not the Person": Instead of tracking the broad S&P 500, look at how specific sectors like healthcare or defense are performing. These are the areas where the executive branch actually has significant "stroke."
- Diversify Beyond the Index: If you're worried about domestic political stability, remember that the S&P 500 is domestic-heavy. International stocks or commodities can provide a hedge when the "Inauguration Index" looks shaky.
- Keep a Long-Term Baseline: Instead of indexing to January 20th, index your own performance to your long-term financial goals. Whether the market is up or down since a specific Tuesday in January shouldn't change your retirement math if you have a 20-year horizon.