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Post-Election Market Returns
10/31/2016 9:00 am EST
We see evidence supporting more new bull market highs ahead. At the same time, we have to temper your enthusiasm by sharing one scary statistic about post-election years, explains Jim Stack, InvesTech Market Analyst.
From inception in March 2009, this has been one of the most unloved bull markets in Wall Street history.
Yet with a total return of 263% and duration of 7.6 years, it has gradually and stubbornly evolved into one of the largest and longest bull markets of the past 85 years.
Meanwhile, market performance in Presidential Election years since 1952 has seen an average gain for the S&P 500 of 6.6%.
This year, despite suffering the worst six-week opening loss in Wall Street history, the S&P 500 is essentially back on track to match historical precedent.
Historically, the market often undergoes some softness around the September-October period; even so, gains usually resume once the election is decided.
So while this year’s extremely contentious political environment could inject volatility heading into the election, history indicates that it won’t detract from year-end performance.
While election years are generally positive for the stock market, there is one little-known unpleasant secret about the year following a Presidential Election.
Over the past 88 years, 9 of the 14 U.S. economic recessions began in the year following the election. Additionally, 3 others began during a Presidential Election year.
There are several logical explanations behind this worrisome post-election trend. In the case of an incumbent President, it makes sense that he or she would (with the cooperation of the Federal Reserve) seek a stable or strong economy heading into the election.
As a result, a tighter monetary policy is likely to be needed early in the second term.
Additionally, when it comes to a newly elected President, if there is going to be any bad news (e.g., bear market or recession), it’s best to get it over with as soon as possible in the 4-year term.
This time around, interest rates are subdued and the economy appears sound prior to Election Day; however, it would not be surprising to see the white gloves come off once the new administration takes office, regardless of who wins.
In sum, the technical and fundamental evidence is still in the bullish court, and historical odds favor ending this election year on a strong note. However, the year after a Presidential Election is notorious for seeing the start of recessions.
So, while the evidence remains in the bullish court for now, we’re maintaining a moderately defensive strategy and are prepared to adjust course if needed once the political dust settles.
By Jim Stack, Editor of InvesTech Market Analyst
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