It seems to be all anyone can talk about for the last few months. This is a very strange election year with crazy headlines and stories to go along with it. So we have gotten the question “How will the presidential election effect the market?” just about every day. For questions like this I am glad I have my crystal ball with me at all times so I can tell my clients exactly what is going to happen. O wait, I don’t have a crystal ball.
Historic Returns
Looking back at election years since 1928, the S&P 500 (Large US Stocks) has had a positive return 21 times, and a negative return 3 times (1). I think most people would find that hard to believe. From another source I found this interesting data.
“Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election, and nearly 6%, on average, in the election year. By contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2%, respectively. A notable recent exception to decent election-year returns: 2008, when the Dow sank nearly 34%. (Returns are based on price only and exclude dividends.) But no one needs to tell you that the current cycle is anything but average. The Dow racked up an impressive 27% in the first year of President Obama’s second term, and 7.5% in year two. Last year, which was supposed to be the strongest of the cycle, saw the Dow Industrials drop 2%.” (2)
Republican vs Democrat
This is another interesting topic that divides people throughout the country, but is there any stock market effect based on which party gets into power? Looking at the numbers, since 1900 Democrat presidents have been slightly better for stocks than Republican presidents. The Dow (US Large Stocks) return when a Democrat President was in office was about 9%, vs the nearly 6% when a Republican was running things. But normal variations in annual stock market returns dwarf that difference, says Russ Koesterich, chief investment strategist at BlackRock. (2)
False Patterns
The worst thing an investor can do is get caught up in trying to find and take advantage to patterns in the stock market. It seems like a good idea, but trust me, it is not in your best interest. For example, there is a super bowl stock market predictor, which states that if the team that wins the Superbowl is a team that had its roots in the original National Football League, then the stock market will decline. There is another pattern showing that every mid decade year ending in 5 (1905, 1915, 1925 etc.) since 1905, has been an up year for stocks. (1) These patterns are just random facts that people try to turn into something that seems important.
In Conclusion
So the best and most honest answer to the question “How will the presidential election effect the market?”, is “I don’t know, but over the long term, stocks have made between 9 and 12% per year on average.”
By Jimmy Hancock
References
1.Anspach, Dana. “How Does the Stock Market Perform During Election Years?” The Balance. About Inc., 16 Oct. 2016. Web. 01 Nov. 2016.
2. Smith, Anne Kates. “How the Presidential Election Will Affect the Stock Market.” Www.kiplinger.com. The Kiplinger Washington Editors, Feb. 2016. Web. 01 Nov. 2016.