Stock Markets and Presidential Elections: A Pattern You Shouldn’t Count On

May 24, 2016


Stock Markets and Presidential Elections | Clay Northam Wealth Management

“There are three kinds of lies: lies, damned lies and statistics.” – Origin uncertain

Nobody really knows the origin of the quote above, often attributed to 19th century British Prime Minister Benjamin Disraeli, but we want to cite it here to caution investors against placing bets on historical trends in the stock market.

Some really dubious trends that investors use include the Super Bowl winner and the nationality of the model on the cover of Sports Illustrated’s swimsuit issue. Still, serious analysts sometimes spend a lot of time sifting the statistics to find meaningful indicators for market returns, like which industry is favored in which part of a business cycle and the significance of transportation stocks to the prevailing market trend.

Experience tells us that even when a historic pattern is reliable MOST of the time, it’s risky to bet the farm on it because there’s a chance that just when an investor decides to go with the trend is when the exception to the trend shows up.

A recent analysis by Sam Stovall, managing director of U.S. equity strategy for S&P Capital IQ, reveals that since 1900 the S&P 500 index of large-cap stocks averages a loss of 1.2 percent in the eighth and final year of a U.S. president’s term in office, as President Obama is now. The reason? Business and investors hate uncertainty, and nobody knows if the incumbent or out-of-power party’s candidate will win the election.

Now, if negative returns happened EVERY time a new president was going to be elected, that’s one thing. But Stovall found that the stock market generates a negative total return on 44% of the time this scenario prevails. To our eyes, that’s not far from a 50-50 bet, and that’s only for a meager 1.2%. Narrowing the time frame to the years since 1944, Stovall found that the same 44% frequency prevails, but the losses are deeper – 1.4% instead of 1.2%, essentially no difference.

So we looked for a trend since Bill Clinton took office, as he and the next president, George W. bush, were both two-termers. In this time frame, the connection looks far stronger. In Clinton’s eighth year (2000), the S&P lost 9.1%. In Bush’s last year (2009) the index lost a whopping 37.0%. But the fact is that these are outliers, and a far shorter trend, and it’s generally safer to plan according to long-term trends.

Looking past the eighth year of a presidential term, what’s the trend for the first year of a new president’s term? Well, there the numbers look a bit more reliable: since 1900 and since 1994, the S&P average returns are 5.2% and 7.6%, respectively. As nice as they might be – and, let’s face it, they’re not fantastic – the frequency of positive returns is 59%. That says it’s a stronger trend, but by no means a sure thing.

But if you’re still interested in reading the presidential election tea leaves consider this: Stovall said to watch how the market does between July 31 and October 31. If the S&P rises over this upcoming period, it means the market believes the incumbent party – in this case, the Democrats – will win the White House, as it has 82% of the time. Conversely, if the index goes down, the replacement party wins the prize, 86% of the time.

The bottom line here is we’re all about numbers, but the numbers we pay more attention to are your particulars: How old you are, what your assets are, what your goals are, and the best long-term strategy to meet them. It will be interesting to see how the presidential trends play out this year and next, but we’re not counting on the election to a significant factor.