It seems like the Presidential election cycle is getting longer and longer, but the end is finally in sight for our latest one. Soon the discussion will shift from who will be in office to what policies the new President will get to work on first. From an investing perspective, some of those policies really matter. Will the new President implement fiscal stimulus? Will the new President implement new regulations or soften them on some industries?
Many of these decisions can have a material impact on stock investors, and, since an incumbent is not running, there is a higher degree of policy uncertainty. This uncertainty can be seen in historical market performance. The chart below, prepared by S&P Global Market Intelligence, gives us some insight into how the U.S. stock market has performed in election and other years.
The table groups, in the bold lines, market returns from each year of a President’s term. Of all the years in a Presidential cycle, the third year is typically the best performing year, while the second year has historically been the worst. It is interesting to note that, when looked at in whole, the average returns from each year were positive. There wasn’t a single year of the four year cycle where the average returns were negative.
The table also shows the difference in results between first term and second term Presidential cycles. When we analyze the data in this format, we can see periods of recurring weakness. Namely, the historical results from our current year (fourth year, second term) are not encouraging.The S&P 500 actually experienced an average decline of -3.3% in the last year of a Presidential cycle when the incumbent is termed out.
However, the following year has been a good one for stocks. The historical return achieved in the first year of a new Presidential cycle was 7.6%. The first year of a first term President, like the combination we are entering into next year, was on the lower side of the average, but still generated an average gain of 6.2%.
This kind of market reaction is understandable. Any change brings uncertainty and investors don’t like uncertainty. However, we should take these results with a grain of salt. Between 1944 and 2015, there were only six periods where this occurred, so the data set isn’t robust. Given that the market is already up for the year, history may not repeat itself this year.
Source: S&P Global Market Intelligence. Past performance is not indicative of future results. Standard & Poor’s (S&P) 500 Index is comprised of 500 large U.S. stocks. Indexes are unmanaged baskets of securities that investors cannot directly invest in; they do not include advisory fees or other investment expenses. The information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.