Stock Market Performance During Election Years
Do presidential elections influence the stock market? Is investor sentiment swayed in the heat of political campaigns? Is there some kind of a pattern that can be discerned that investors can take advantage of? It's a topic that preoccupies us every four years.
Studies on Election Years and Market Returns
When you examine the return of the S&P 500 Index for each election year since 1928, you can see that of the last 21 election years, there have been only three years where the S&P 500 Index had a negative return during an election year.
Marshall D. Nickles, EdD, expanded upon this data in a paper called Presidential Elections and Stock Market Cycles. His detailed research shows that a profitable strategy would be to invest on October 1st of the second year of a presidential term and sell on December 31st of year four. After laying out the data to support this strategy, he goes on to write:
“However, just when you think that you have figured it all out, you find another pattern that can suggest different possibilities. For instance, another analysis shows a highly intriguing re-occurrence in the stock market index. During the entire twentieth century, every mid-decade year that ended in a '5' (1905, 1915, 1925, etc.) was profitable!”
This is exactly what a field of study called behavioral finance has told us repeatedly: We may see patterns, but that doesn’t mean they're relevant to the decisions we're about to make.
In a 2007 study similar to Nickle's, Wells Fargo’s Chief Investment Officer, Dean A.
Junkans, CFA, and its Senior Investment Manager, James P. Estes, PhD, CFP showed that the average market return in the fourth year of a presidential term is twice that of the return in the first year of a president’s term. Is this data useful? Only if the pattern continues.
Should You Make Decisions Based on Election Year Market Cycles?
If you hired an investment advisor familiar with the studies above, they'd show you the outstanding returns you wouldve experienced over the past 20 years if you'd entered the stock market during the later years of presidential terms and exited during the initial years.
This advisor’s strategy would probably sound reasonable. You may even have expected that in 2008, the market should have twice the return it had in 2005. (In 2005, the S&P 500 Index returned 4.90%.) During the 2008 election cycle, if you invested on October 1, 2006 until December 31, 2008, your investments would have been down by 6.8%.
While the pattern didn't work for the 2008 election cycle, it looks like 2016 turned out well. The period from October 1, 2015 through year-end 2016 delivered a strong positive return. What's in store for 2020? Your guess is as good as ours.
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 this deep-seated belief that many people have that there's a way to “beat the market," and someone out there knows how to do it.
If that's not you, it might be better to invest the boring, safe 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. Or as noted economist Paul Samuelson wrote in an often-cited quote on investing: “Investing should be like watching paint dry or watching grass grow.
If you want excitement…go to Las Vegas.”
Election Year Stock Market Returns
Table Below Shows Market Returns for Each Election Year Since 1928
Data below is from the Dimensional Funds Matrix Book
|S&P 500 Stock Market Returns|
During Election Years
|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||.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%||Clinton vs. Dole|
|2000||-9.1%||Bush vs. Gore|
|2004||10.9%||Bush vs. Kerry|
|2008||-37%||Obama vs. McCain|
|2012||16%||Obama vs. Romney|
|2016||11.9%||Trump vs. Clinton|
Source: Elections and the Market: Are They Related? by Dean A. Junkans, CFA, Chief Investment Officer and James P Estes, Ph.D., CFP, Senior Investment Managerublished October 18, 2007, in the Wells Fargo Quick Market Update.