Rick Welch: Dollars and $ense

Will the election trump the market?

trump   v.t.  1, to override.  2, to be more important than.

Every four years American voters go to the polls to choose a new President.   As the anticipation of selecting a new leader intensifies throughout the election year many investors are focused on how the stock market may be impacted by the long campaigns and eventual outcome.  Is there a correlation between presidential election cycles and stock market returns?  Yes there is, however, the degree of correlation might be a surprise.

In the 14 presidential election years since 1960, the S&P 500 has fallen just three times: 1960 (-3.0%), 2000 (-9.1%) and during the most recent recession in 2008 (-37.0%).   The average annual return for the 14 presidential election years is +9.1%, slightly better than the overall period average annual return of +8.8%.  This election year data suggests that 2016 could yet provide above average market returns, however, we must acknowledge the tight cluster of election years (2000 and 2008) in which the market declined. History teaches us that within the 4-year presidential election cycle the smallest gains, on average, are typically seen in the post-election year and then the mid-term year. The largest stock market gains (about +10.2%) are typically seen in the pre-election year. With that in mind, we must ask what happened in 2015.  With a loss of -0.7% by the S&P 500, the stock market declined for the first time (in a pre-election year) in over 80 years.

The prevailing wisdom is that presidential elections add political instability and uncertainty to the mix of other factors (like GDP growth, interest rates and unemployment) that may already be impacting the broader market.  In the months leading up to the election, we will be bombarded with anecdotal evidence that if considered in isolation can be misleading.  Suggestions that a win by a Republican candidate (often considered more business-friendly) over a Democratic candidate would be better for the stock market are not supported by history.  Another common premise suggests that a divided congress will accomplish little legislatively and that the resulting lack of progress is supportive of stock price growth.  Yes, but there is more to this story. In fact, during presidential election years in which Republicans control Congress (like 2016), the S&P 500 typically returns a solid +19.7%, versus an average gain of +7.6% with a divided Congress and just +3.2% when Democrats are in control.

What can we expect in 2016? Lots of twists and turns and a few surprises. Investors find comfort in establishment candidates like Hilary Clinton who are deemed to be experienced in the nuances of governing and are viewed as being predictable. Political newcomers, like Donald Trump, bring energy and excitement to the campaign and some apprehension as to how they might actually govern should they be elected.  Stock price performance in the summer leading up to a presidential election can offer some insight into which candidate will be successful in November.  When the market climbs from August through October the incumbent party has a great track record winning 82% of the time. In contrast, a falling market during the same time period is predictive (over 86%) of a win by the replacement party.

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