Now that all political party conventions have passed, it’s that time where Americans start questioning volatility of the stock market; every four years, politics and finance converge as Americans elect a new president, looking to investors and financial advisors to figure out what each possible outcome means for their own portfolios. History shows that indeed, the presidential election cycles correlate with stock market returns. The exact impact on the market though, is interesting and has Chicago financial advisors imploring their clients to consider a few different points this election year.
The Presidential Cycle
Since 1833, the year before a presidential election has shown the Dow Jones industrial average has increased on average 10.4%. The year of the presidential election, the average increase is 6%. The smallest increases unfortunately, are when the new President starts their term; gains during these first and second years slow down to averages of 2.5% and 4.2%. For the past 182 years, the stock market as ebbed and flowed with the four-year election cycle. The first two years of a President’s term are where we are more likely to see wars, bear markets, and recessions according to the Stock Trader’s Almanac; the second half of the term is where we see bull markets and more prosperous times.
Incumbents and re-elections
While history shows most incumbents win re-elections to preserve a sense of continuity, that isn’t the only reason the markets prefer seeing a reelection for the White House. Incumbents are well liked because as they attempt to get reelected, they are hyper-focused on the economic issues at hand. They promote market-friendly policies because they have been knee deep in it for 4 years already.
It’s no secret, that this current presidential cycle has been anything but average during Obama’s presidency. The first year of President Obama’s second term, we saw the Dow increase 27% and 7.5% in his second year of his second term. This doesn’t come as a huge surprise as historically, when an incumbent, or someone already in the presidency is being re-elected, the stock market is more stable and the Dow average usually performs better. Inversely, the third year of Obama’s second term, which was projected to be even better than year two, the Dow dropped 2%. These unexpected changes on the market in the last two years under the Obama administration has investors wondering if history has much to do at all with how the future election will impact their portfolios.
Democrat or Republican?
This year especially, with passions running high, investors may feel strongly about who they elect, thinking that it may have the biggest impact on their portfolios, but the truth is, when it comes to political parties, it doesn’t matter which party wins. While one might think Republicans, thought of as more “business-friendly” than Democrats might benefit stock holdings more than the latter, a look back shows little to no difference. In fact, Democrats have been slightly better for stocks historically, but the data isn’t different enough to absolutely say that one party will be better than the other for the market.
As Election Day quickly approaches, it is important to remember that while the recognition of historical market trends we just discussed can provide some beneficial insight, the greater emphases should be on your goals or your clients’ goals. Asses what an investor’s specific financial goals are, their income needs, their investment time-frame and willingness to take risk when managing their portfolios that is resilient and can handle a wide variety of different market environments. Stay focused on the big picture and the larger market trends that may have less to do with the presidential election, and more to do with economic trends right now such as cloud computing, the digital era, cyber security systems; all things that won’t change or be much affected by whoever is in the White House come 2017.
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