How will the Presidential Election Impact the Markets?

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Matthew Jarrell

22 Apr, 2016

in Psychology

With the 2016 Presidential election just months away, the question often asked is: "How will the upcoming election affect the financial markets?" It's a fair and understandable question.

Elections generate world wide attention in the major economies around the world. There is no exception when considering the world's largest economy, the United States. The country will choose a new president in November and usher in a new era of the Free World. Such an event is significant to financial markets and to illustrate the point, one doesn't need to look very far. Many economists study such events for patterns and nuances trying to determine if there is a predictable relationship between elections and financial markets.

It may surprise you to learn that there are some very compelling data suggesting a strong correlation of market performance and elections. How can that be? Instead of starting with a presupposition that there is, in fact, a correlation, let's look at both sides of the line graph and draw conclusions once we have a bigger picture.

Marshall Nickles published an article in 2004 suggesting that avoiding markets from the first day of the inaugural year of a presidency through the end of the 3rd quarter produced a theoretical gain of 7,170% over five decades. That's the article - Presidential Elections and Stock Market Cycles - in a nutshell. Holy political smokes! That's a portfolio manager's dream! Any DIY investor would be delighted to have such a clear path to navigating the unpredictable financial market place.

But wait. Nickles further expounds: "However, just when you think that you have figured it all out, you find another pattern that can suggest different possibilities. For instance, another analysis shows a highly intriguing re-occurrence in the stock market index. During the entire twentieth century, every mid-decade year that ended in a “5” (1905, 1915, 1925, etc.) was profitable! This is not to say that all of these years had uninterrupted ascending trends, but by year’s end there had been impressive gains. Whether that pattern was a fluke or will continue in the 21st century is anyone’s guess. And, 2005 is also an inaugural year."

Wait what?! Not exactly a convincing summary. Nickles realizes here that the significance of this finding may be waning and not the end-all, bullet proof solution investors are seeking. I also believe that the old adage, "hindsight is 20/20" just might nullify the merit behind the Pepperdine University scholar's findings. One might as easily explain the findings of this article by overlaying leap years or Summer Olympics instead of elections.

If You Go Looking for Something Eventually You'll Find It
Another more recent article suggests election years where a new president must be elected were slightly negative (-4%) as opposed to all other years. It also suggests findings in Congressional control and outgoing political parties. It also shows results with and without 2008. Those darn recession years. While entertaining, the article eventually correlates these trends to corresponding economic data in GDP, unemployment and financial performance of sequential years.

What do the statistics show us? Data doesn't lie but it can be manipulated and overlayed to complicate even the most mundane of circumstances. Economic cycles don't generally care who's president. And "bull markets don't die of old age." -Brain Westbury.

The Candidates
What do we know about the 2016 Presidential election? It's a circus. We're at the beginning of the primary schedule and this circus is officially on the road. While the mudslinging and bantering seam the political platforms for any candidate in the 21st Century, it's at a seemingly, all-time high with "The Donald" in the running. There's one thing that is baffling about the U.S. presidential election process: you need millions of dollars to compete and win. Nonetheless, we're entertained every four years to the political musings that could be more about individual gain than representing the greater good. But I digress.

What to Look for in a Candidate
During an election year what most investors might consider are the following:

1. Foreign Policy - How well does the incumbent or new elected president support economic growth with our neighbors. Free trade is complex but as the world economies sync it's a bit easier to follow.

2. Unemployment Rate - Strong employment suggests that jobs are plentiful and the economy is growing. The current rate is below 5%. That's fantastic but this number as a stand alone is not significant enough as a measurement to indicate the overall health of an economic system.

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