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Elections and Markets – What History Tells Us

With the start of the Republican Convention this week and obviously a big election cycle this year, I thought it would be worth taking a look at market results and elections.  For years I have heard various versions of which party is better for the stock market and its performance.  I thought I would take this week’s commentary to give some quick results of what the market has actually done.  Fortunately, there was a great article on Kiplinger earlier this year with lots of data to help us out.

Recessions and bear markets are more likely to occur in the first two years of a Presidential four-year term.  During the first half of the term the Dow Jones (Dow) has averaged 2.5% and 4.2% respectively in the first and second years. Since 1832 the Dow has averaged 10.4% returns in the year preceding an election while the actual election year has seen an average of 6%.  I’m sure we all remember 2008, when the market returned a negative 34%.

Let’s see what happens if we take a deeper dive into which party controls the White House.  The Dow data here only goes back to around 1900.  The Dow averaged annual returns of 9% when Democrats controlled the White House, while it returned 6% annually when the Republicans controlled it.  Most analysts consider this a push where it really does not matter which party controls the White House.

What about if there is a divided government where one party does not control all of Congress and the White House?  This data goes back to 1928 and it looks at the S&P500.  When one party controls the White House and Congress the S&P500 averaged annual returns of 16.9% the first two years after an election.  If one party controls both houses of Congress and the other party controls the White House, the average annual return is 15.6%.  Now, if the two houses of Congress are divided the average returns are 5.5%.  Again, recent returns have not followed these trends as after elections in 2010 and 2012 the two-year returns of the S&P500 have been 19% and 42% respectively.

The most interesting information I gleaned while researching for this week’s commentary is the performance of the stock market the three months immediately preceding the Presidential election are the most telling.  Going back to 1928, 14 of the 22 Presidential election cycles saw the market go up during this three-month period.  In 12 of those 14 elections the incumbent party maintained control of the White House.  In 7 of the 8 elections where the market was down the incumbent party did not maintain control.  According to the data, the performance of the S&P500 has an 86% probability of predicting which party will control the White House.

What does this really tell us?  Not a whole lot as to which party is better for the performance of the stock market.  What I read out of this is the market performs regardless of who controls Congress or the White House.  To quote Benjamin Graham – “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”

About Dan Johnson, CFP

I am the President and CCO of Forward Thinking Wealth Management, LLC, which is the flat-fee financial planning firm located in Akron, OH, and set up to work virtually with clients across the country. I charge clients a flat fee of $4,800 regardless of asset size. My firm is a solution to what I feel is a broken system where clients pay advisors based on something out of their control - the performance of the market.
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