Every four years, the same question, “It’s an election year, what will the stock market do?”
I keep a crystal ball on my desk just for these occasions. When asked such a question, I reach over, pick up my crystal bar, and stare. After a sufficiently long pause, I look up and say, “The market will be up 9.45% this year.”
After a laugh, we can get down to answering the real question which is “Should I be doing anything differently with my money right now?” If you established a smart investment strategy to start with, the answer is usually no.
For those who want to understand why, let’s look at past elections, and the research that has been done in an attempt to answer the questions about election years and stock market returns.
First, the data.
Studies on Election Years and Market Returns
The table at the bottom of the page shows the return of the S&P 500 Index for each election year since 1928. At a glance, you can see that of the last 21 election years there have been only 3 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 say:
“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!”
The point he is making is the same point that a field of study called behavioral finance has told us over and over again; we may see patterns, but that doesn’t mean they are relevant to the decisions we are about to make.
In a study similar to Marshall’s, Wells Fargo’s Chief Investment Officer, Dean A. Junkans, CFA, and their Senior Investment Manager, James P. Estes, PhD, CFP(1) show 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.
If you're looking for a pattern, why not try the Super Bowl Stock Market Predictor. It says that, "If the team that wins the Super Bowl has its roots in the original National Football League, the market will increase. If the winning team was originally from the old American Football League, the market will decline."
Should You Make Decisions Based on Election Year Market Cycles?
Suppose you hired an investment advisor who was familiar with the studies above. They show you the outstanding returns you would have experienced over the past twenty years if you had entered the stock market during the later years of presidential terms, and exited during the initial years.
Likely, this advisor’s strategy would sound reasonable. You may even have had the expectation that in 2008, the market should have twice the return that 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 of 2006, until December 31st of 2008, your investments would have been down by 6.8%.
The pattern did not work for the 2008 election cycle. What's in store for 2012? Your guess is as good as mine.
The problem with investing based on such data patterns: 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 is a way to “beat the market’, and someone out there knows how to do it.
If you find them, let me know.
In the meantime, I’ll continue to invest the boring, safe way. It involves understanding risk and return, diversifying, and buying low cost index funds to own for the long term... I know it works, no matter who wins the election.
(1) Elections and the Market: Are They Related? Published October 18, 2007 in the Wells Fargo Quick Market Update. Written by Dean A. Junkans, CFA, Chief Investment Officer and James P Estes, PhD, CFP, Senior Investment Manager.
Election Year Stock Market Returns
For election year market return data since 1900 see the downloadable PDF put together by MFS® Investment Management called Primaries, caucuses, and elections … oh my!.
Table Below Shows Market Returns for Each Election Year Since 1928
Data below is from Dimensional Funds Matrix Book 2011
|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||?||Obama vs. Romney|