Stock Market Performance in Presidential Election Years.
Do presidential elections influence the stock market? On the one hand, it’s true that the stock market is cyclical, which makes it possible for investors to look to history to observe trends and make predictions.
But you can’t always count on future returns to match past ones. Despite some consistent patterns, election years are no exception to this rule.
Studies on Election Years and Market Returns
According to the 2019 Dimensional Funds report, the market has been positive overall in 19 of the last 23 election years from 1928–2016, only showing negative returns four times.1
When you further examine the years between elections, however, it becomes apparent that year three of a president’s term is usually the strongest year for the market, followed by year four, then the second, and finally the first.
This “Presidential Election Cycle Theory” was originally put forth by Yale Hirsch, creator of the Stock Trader’s Almanac. It was furthered by Pepperdine professor Marshall Nickles, in a paper called “Presidential Elections and Stock Market Cycles,” which presented data showing that a profitable strategy would be to invest on Oct. 1 of the second year of a presidential term and sell on Dec. 31 of year four.2
These studies have pointed out some important trends, but that doesn’t mean they always hold true.
Past Results Don’t Guarantee Future Performance
Recent history has particularly challenged these patterns. During the presidencies of Barack Obama and Donald Trump, these stock market theories did not hold up. In each of Obama’s terms, the first two years were more profitable than the third, and for Trump, the first year was more profitable than the second, before a major surge in his third year, followed by the volatile, coronavirus-plagued markets of 2020.1
For investors trying to time the markets during these presidential terms, performance did not match past market data.
If you were to follow the theory that the fourth year of a term sees better returns than the first term, the market in 2008 should have delivered better returns than it did in 2005, when George W. Bush started his second term as president and the S&P 500 Index gained 4.91%. But 2008, an election year, saw returns drop by 37.00%. If you had followed the theory and invested in the stock market from Oct. 1, 2006, until Dec. 31, 2008, your investments would have been down.
You Can’t Beat the Market
The problem with investing based on such data patterns is that it’s not a sound way to go about making investment decisions. It sounds exciting, and it fulfills a belief that many people have that there’s a way to “beat the market.” But it’s no guarantee. There are too many other forces at work that affect market conditions.
Furthermore, the underlying assumptions informing these theories may not hold up, either. These assumptions hold that the first year of a term sees a recently elected president working to fulfill campaign promises and that the final two years are consumed by campaigning and efforts to strengthen the economy. These assumptions may prove true in some cases, but likely not always.
It might be better to invest in a less exciting but safer way, which involves understanding risk and return, diversifying, and buying low-cost index funds to own for the long term, no matter who wins the election. As noted economist and Nobel Prize winner Paul Samuelson put it, “Investing should be like watching paint dry or grass grow. If you want excitement … go to Las Vegas.”
Election Year Stock Market Returns
Here are the market results for the S&P 500 for every election year since 1928. Data below is from Dimensional’s Matrix Book 2019.
| S&P 500 Annual Stock Market Returns During Election Years | ||
|---|---|---|
| Year | Return | Candidates |
| 1928 | 43.6% | Hoover vs. Smith |
| 1932 | -8.2% | Roosevelt vs. Hoover |
| 1936 | 33.9% | Roosevelt vs. Landon |
| 1940 | -9.8% | Roosevelt vs. Willkie |
| 1944 | 19.7% | Roosevelt vs. Dewey |
| 1948 | 5.5% | Truman vs. Dewey |
| 1952 | 18.4% | Eisenhower vs. Stevenson |
| 1956 | 6.6% | Eisenhower vs. Stevenson |
| 1960 | 0.50% | Kennedy vs. Nixon |
| 1964 | 16.5% | Johnson vs. Goldwater |
| 1968 | 11.1% | Nixon vs. Humphrey |
| 1972 | 19.0% | Nixon vs. McGovern |
| 1976 | 23.8% | Carter vs. Ford |
| 1980 | 32.4% | Reagan vs. Carter |
| 1984 | 6.3% | Reagan vs. Mondale |
| 1988 | 16.8% | Bush vs. Dukakis |
| 1992 | 7.6% | Clinton vs. Bush |
| 1996 | 23.0% | Clinton vs. Dole |
| 2000 | -9.1% | Bush vs. Gore |
| 2004 | 10.9% | Bush vs. Kerry |
| 2008 | -37.0% | Obama vs. McCain |
| 2012 | 16.0% | Obama vs. Romney |
| 2016 | 12.0% | Trump vs. Clinton |
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
SOURCE: https://www.thebalance.com/presidential-elections-and-stock-market-returns-2388526
