Presidential Elections and the Stock Market

By Shane Barber

December 16, 2019

Presidential Elections and the Stock Market

As the year 2019 comes to a close and 2020, a presidential election year looms large on the horizon. I find myself answering the same question daily. The question is essentially this; “How will the Presidential Election affect the stock market?” And I know, as sure as I’m sitting here writing this article, the majority of you reading this want to know the same thing. 

To that end, I thought it would be a good idea to take the time to go through some of the extensive research done on this subject. I’ve pulled it together in one place to share it with you. That way, when your friends ask YOU how the presidential election will affect the stock market, you’ll have an answer that just might make you look well-informed. But don’t be surprised if you get a raised eyebrow or two when you tell them what you know.

What Can History Teach Us About Presidential Elections and the Stock Market?

As Mark Twain once famously said, “History doesn’t repeat itself, but it often rhymes.” That’s certainly the case with presidential elections and the stock market cycles that accompany a presidential term. Mark Hulbert has a great article on MarketWatch that contained the following chart showing what much of the other research that I’ve read shows, the best year for stocks in a four year presidential term is the third year. 

Presidential Elections and the Stock Market - Election Year Cycle Turns Negative

Presidential Elections and the Stock Market – Election Year Cycle Turns Negative: Opinion: Another stock market worry: The year leading up to a presidential election tends to be below average

This chart tends to confirm what most of us intuitively feel. The year of a presidential election may not be the best for the stock market. Not that it’s necessarily bad, but by comparison, the third year is far and away from the best in a four year presidential term, historically speaking. Mr. Hulbert points out in his article that the reason for the below-average performance in the third year could have everything to do with the uncertainty created by the upcoming election. 

Uncertainty versus the Stock Market

As we’ve noted in numerous articles we’ve written, the markets do not like uncertainty…in fact, it’s their kryptonite. The uncertainty can come in a variety of forms, including fear of policies proposed by the opposing candidate. 

As Anna-Louise Jackson points out in her article posted to grow, the hedge fund legend Paul Tudor Jones says he predicts that the S&P500 will drop by 25% if Elizabeth Warren wins the 2020 election. That sentiment was echoed by billionaire investor Leon Cooperman who calls for a similar market decline if either Elizabeth Warren or Bernie Sanders are elected. This kind of fear in a presidential election year can undoubtedly affect the stock market’s performance negatively. However, as she points out in her article, “Markets can be surprisingly resilient, even impervious to politics.” 

185 Years of Data – The Long Term Perspective on Presidential Elections and the Stock Market

When attempting to gain perspective, I believe the more data you have, the better your perspective will be. It’s like a digital picture if you will. Digital pictures are nothing more than tiny dots of color (pixels) that recreate an image. The more tiny dots you have (think megapixels), the sharper the image will become. Historical perspective is no different; we just use more years and numbers instead of megapixels to gain a better perspective. 

Anna Kates Smith, Executive Editor for Kiplinger, wrote an article back in 2016 discussing this very thing. In the article, she cites The Stock Market Trader’s Almanac, which asserts that wars, bear markets, and recessions tend to start in the first two years of a president’s term. That’s likely due to the uncertainty we spoke of earlier. However, more importantly, she points out that in the period from 1833 – 2016, the Dow Jones Industrial Average has gained an average of 10.4% in the year before an election year and nearly 6% in the year of the election. 

In contrast, the first and second years of a presidential term saw average gains of 2.5% and 4.2%, respectively. Obviously, this is not the case all the time. 2008, which should have been a decent year based on the historical data saw the Dow fall by almost 34% as the Great Recession took hold, and 2015, which should have been the best year in Obama’s second term, saw the Dow fall by 2%. However, 2019, Trump’s 3rd year in his first term, is shaping up to be a banner year, right in line with the historical trends, and despite a myriad of geopolitical and domestic obstacles. So it’s not a crystal ball, but it certainly gives us perspective. 

Is There a Stock Market Investment Strategy for Presidential Elections?

The short answer to that question is…maybe. However, making investment decisions based on the presidential election cycle rather than on fundamentals, your goals, and objectives, is kind of like picking the prettiest horse or the cutest dog at the track. It’s not the best strategy long term. But that didn’t stop Pepperdine University professor Marshall Nickles from writing a paper on his findings on Presidential Elections and Stock Market Cycles in 2004, which attempted to find the answer to the question above.

In his paper, he took the same type of data we’ve been discussing here so far. He focused on the period from 1952 to October of 2002, where he had speculated that the most favorable time to be invested in the stock market was from October 1st of the second year of a presidential term to December 31st of the presidential election year. He also theorized, based on his findings, that January 1st of the inaugural year of a president’s term to September 30th of the second year of a presidential term was the least favorable time to be invested in the stock market. Then he calculated the returns for both the most favorable and least favorable times, using a $1,000 initial investment, and assigned the most favorable times to investor 1 and the least to investor 2. The chart below shows his findings, and they’re striking. 

Studying 50 Years of Presidential Elections and the Stock Market

Over the 50 years of his study, investor 1 turned his original $1,000 into a whopping $72,701 over those 50 years. Conversely, investor 2 managed to turn his initial $1,000 into a not so whopping $643. That is genuinely some compelling evidence for an investment strategy based on the presidential election cycle and the stock market performance that accompanies it. 

However, I know for a fact that none of you would have been happy with the strategy. Not one of you. How do I know? Take a closer look at the chart. In 6 out of those 13 presidential cycles, investor 1’s strategy left money on the table, SUBSTANTIAL money. Knowing human nature as I do, there isn’t an ounce of doubt in my mind while you might have been thankful to have missed the 7 money-losing periods; your anger and frustration at having missed the 6 money-making periods would have far more space in your head than it deserved. Some of you would have even fired the person managing your money in those years. You know who you are. 

In reality, theories like this are just that. Theories. Even though it’s 50 years, it’s still too short of a period to be valid. And like all theories, what the author doesn’t know when they conceive an idea, it inevitably comes to light in the future. Remember what Mark Twain said. “History doesn’t repeat, but it often rhymes,” — especially given enough time. 

Presidential Elections and the Stock Market - Presidential Elections and Stock Market Cycles

Presidential Elections and the Stock Market – Presidential Elections and Stock Market Cycles: Presidential Elections and Stock Market Cycles

Election Cycle Stock Market Investment Strategies Work Until They Don’t During Presidential Elections

Eight years after publishing his paper, Professor Nickles amended his findings in an updated analysis. Under the heading of “The 2008 Anamoly” he laments the following:

“Based on the earlier analysis, it would make sense to invest in the DJIA at the beginning of the favorable period and steer clear of the market during the unfavorable period. This would have been the strategy of choice from 1950 to 2004. However, the negative economic events surrounding the last 2008 presidential election temporarily broke that long-standing trend.”

What he’s saying, without saying it, is that trends are meant to be broken. Long term trends give us perspective, but they can’t predict the unpredictable. Similar to 2007-2009, which was the worst economic crisis since the Great Depression. He published a new chart showing the updated results based on the’ 04-’12 timeframe. And for once, investor 2 had the last laugh. He didn’t gain much, but he didn’t take a beating either. 

Take a look. 

Presidential Elections and the Stock Market - Value of $1000 Invested 1953

Presidential Elections and the Stock Market – Value of $1000 Invested 1953: The Four-Year U.S. Presidential Cycle and the Stock Market

Fundamentals, Fundamentals, Fundamentals!

Arguably, based on the first chart of Professor Nickles’, the best strategy during ANY time frame, is to invest based on sound fundamentals, the goals you have for your life, and the things you truly care about. Then, take the longer view. Remember, at 65, if you live to 100, which 50% of you reading this have a high probability of, your money’s time horizon is 35 years. So, focus on things in life that are important. Ignore the noise and volatility that’s always going to occur. Taking your focus off of the important things in life will cause you to make bad decisions, and might even give you migraines more painful than those caused by political ads during a presidential election. Speaking of…

The Power of Prediction and Presidential Elections and the Stock Market

When I’m asked what the stock market is going to do in a certain time frame, I always remind people my crystal ball came from the set of a Liberty Mutual commercial and isn’t, in fact, real. Also, I freed Zoltar. But I digress. 

We’ve all wanted to have, or know someone with, the power to predict the future at some point in our younger lives. No matter how scary knowing what’s coming may be. Most of us have realized that sometimes not knowing is WAY better than knowing. So, being able to predict the outcome of a presidential election via the stock market may not be as cool today as we once thought it was.

But, the stock market does have an uncanny accuracy rate at predicting whether or not the incumbent president or his rival candidate from the other party will win the election in a bid for reelection; or the out of power party taking control from the in-power party at the end of a second term. If the stock market is up in the three months ahead of a presidential election, put your money on the incumbent. If it is down over those three months, prepare for a new party in power.

Here Are the Numbers

Since 1928 there have been 23 presidential elections. In…

  • 14 of those presidential election years, the stock market saw gains in the three months leading up to Election Day.
  • 12 out of those 14 instances, the incumbent (or incumbent party) won the day.
  • 8 of the 9 cases where the stock market had losses in the three months before the election, the incumbent (or incumbent party) went packing.
  • 20 out of 23 presidential elections, the stock market predicted the outcome.

That’s an 86.95% accuracy rate. So, if you’re inclined to wager on elections with your friends, this may give you a leg up. That is, unless they know the secret too. 

Presidential Elections and the Stock Market, Take it all in Stride…and with a Grain of Salt!

As I was researching all the data for this article, one thing became painfully apparent to me. The best strategy in a presidential election year is the strategy you developed based on what’s important to you. Period. Trying to invest or make investment decisions around presidential elections and the stock market is a fool’s errand. There are many people with opinions, studies, papers, and strategies that will tell you they’ve got this all figured out. They don’t, just like the examples I cited earlier. 

I encourage you if you’re inclined to do some research here, do so with an open mind and take it all with a grain of salt. After all, there are no functioning crystal balls, and Vegas wasn’t built with the money of the winners. 

Here’s wishing you a happy, healthy, and prosperous 2020 filled with love, laughter, and joy! 

If you have worries about uncertainty during this upcoming election cycle, please give us a call at 913-393-1000 or schedule a complimentary consultation below. We’re here to help you understand how your retirement plan will react to certain market circumstances.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.