Election Years: A Positive Bias
07/22/2016 9:00 am EST
Presidential election years are generally recognized as being fairly benign for the stock market, with an average mid-single-digit gain in the S&P 500, explains Jim Stack, market historian, money manager and editor of InvesTech Market Analyst.
There are several reasons for investor optimism during an election year. As politicians hit the campaign trail, it’s rare to see onerous tax and spending bills, or any other controversial legislation, emerge from Congress.
In addition, the Federal Reserve is also quiescent. Historically, interest rate hikes, if any, are kept to a minimum.
Bottom line, nobody wants to be blamed for torpedoing political aspirations. So all this tends to provide subtle stimulus in major election years, which is then welcomed on Wall Street.
When averaging Presidential Election year returns over the last 60 years, the gain for the S&P 500 has been 6.6%. Seven of the past nine shown ended the year higher than where they began.
Most of the market gains were concentrated in the second half of the year. Overall, in the 22 election years shown in the table at right, the majority of gain (>80%) came in the second half of the election year.
* The majority of years have been positive – only 4 out of 22 suffered greater than a 3% loss.
* In all but 4 election years, the market was at or near its yearly high in the fourth quarter.
* There were only 3 instances where the low for the year occurred in the 4th quarter, and 2 were confirmed bear markets.
* The average gain for these election years has been 6.9%. Excluding the 2008 financial crisis, the average jumps to 9.1%.
The important conclusion for our current strategy is that market volatility, like we’ve seen in 2016, is not out of the ordinary in a Presidential Election year.
Longer-term, 16 of the past 22 election years closed with gains. But gains are not guaranteed. The election years of 2000 and 2008 occurred during two of the most significant bear markets of the past 40 years
The market tends to improve as the year progresses, but often experiences some softness around the September-October period, in the two months leading up to Election Day. Gains often resume once the election is decided.
By Jim Stack, Editor of InvesTech Market Analyst