The Election Effect on the Stock Market
Could the 2016 presidential election influence the direction of the markets?
Open the newspaper or turn on the TV and you know the 2016 presidential election cycle is in full swing. Whether it’s Donald Trump, Carly Fiorina, Hillary Clinton or the many other presidential hopefuls vying for their White House bids, there is one thing we know: history shows presidential election cycles have the potential to influence the direction of the economy and, in turn, the markets. Things like tax rates, budgetary decisions and investment policies all hang in the balance of the elected candidate’s decisions and beliefs. These are just a few reasons why investors have kept a close eye on the markets every four years.
We want to state up front that past stock market activity is not an actual indicator of future market activity* or of one political party’s prospects. That said, here are some interesting facts about previous presidential election cycles and their effect on the markets:
Election Effect #1: One common myth is that Republican candidates are better for stocks. Actually, a 2012 study by Adviser Perspectives newsletter found that since 1900, the Dow Jones Industrial Average gained about 8.7 percent annually under a Democratic president, compared with 5.7 percent under Republicans.1
Election Effect #2: According to the Stock Trader’s Almanac, historical analysis of past election years shows during the tail end of presidential election years, stocks tend to be on the bullish side, no matter what candidate wins.2 In fact, the Standard & Poor's 500 rose in the final seven months in 13 of the past 15 presidential election years from 1950 to 2011.3
Election Effect #3: Election years do not normally constitute a big loss for stocks. According to Ned Davis Research, since 1900, stocks grow 3.4 percent on average in the post-election year, compared with gains of 4.0 percent in the midterm year, 11.3 percent in the pre-election year and 9.5 percent in an election year.4
Election Effect #4: Looking back on past election years, the Stock Trader’s Almanac shows that when the current political party in power wins the office, which has happened 16 out of the past 27 elections (1901-2011), the Dow rose by about 1.5 percent in the first two quarters of the year before the election. Compared to the Dow’s activity, if the political party was ousted then the blue chip index lost about 4.6 percent in the first two quarters of the year before the election.5
Despite historic market trends, it’s best not to draw conclusions about the presidential election effect on stock market performance. Let us not forget 2008 when investors suffered one of the worst bear markets on record, despite it being an election year.
PlanningWorks advises going with tried and true investment advice: stay invested for the long-term and maintain a diversified investment portfolio that fits your investment style and goals. Please don’t hesitate to contact PlanningWorks to discuss your concerns.
* Past performance is not a predictor of future investment results. Investing involves risk including the loss of your principal. Prior to investing, you should consult with a financial advisor to discuss the risks, expenses and objectives of any investments.