Presidents, Politics, and the U.S. Stock Market

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Lee Bohl

17 Jun, 2016

in Indices

In November of 2016 Americans will choose a new president. A detailed study of history can give us some interesting clues on how the USstock market might behave regardless of who wins.

Many market analysts have noted a general tendency for the stock market to experience a meaningful price bottom roughly every four years.  Of course, the exact timing from low to low does not always correspond to an exact four year cycle.  Still, there does appear to be some correlation between the action of the stock market and the four year period that extends from one presidential election to the next.  This is most commonly referred to as the “Election Cycle.”

The Election Cycle
The “Election Cycle” as generally defined, consists of the Post-Election, Mid-Term, Pre-Election and Election years.

  • The post-election year is the year when the new, or returning, President is inaugurated.
  • Following the President’s first year in office comes the” Midterm year.”  In this second year, congressional elections take place, bringing with them the potential to shift the political makeup and the legislative/executive branch dynamic.
  • The third year of the cycle is the pre-election year – this is the year candidates begin launching their campaigns and engaging in political debates
  • Finally, there is the election year during in which primaries are held nominee debates take place, culminating in the general election in November.

Figure 1 shows that there seem to be some meaningful differences in both rates of return and winning percentages in each of the election cycle years.  The first two years the of the cycle tend to be weaker than the last two, with the post- election year being the weakest year and the pre-election year the strongest.

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Figure 1.

 

A year-by-year analysis can provide further insights.

Post-election year
The post-election year has historically been the weakest of the four in terms of winning percentage, and the second worse in terms of net annual gain.  Some analysts attribute this to the president tackling the most painful economic initiatives early in his or her term so that times are better when the next election rolls around.  It is interesting that many major bear markets have started in the post-election year, specifically in 1929, 1937, 1957, 1969, 1973 and 1981.  Also, some major wars have started in the post- election year as well:  1861 (the beginning of theU.S.Civil war), 1917 (U.S.entry into WWI), 1941(U.S entry into WWII) and 1965 (Vietnam War).

Examining Figure 2, we can see that stock market performance during Post-Election years can best be described as “all or nothing.”  To put it another way, whichever way the market moves, it tends to move in a meaningful way.   While Post-Election years have a mixed record of up vs. down years (48/52) what is interesting is that all of the “up” years generated a double digit gain, and six of the ten “down” years generated a double digit decline. 

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Figure 2.

Mid-term election year:
Mid-term election years tend to have a higher winning percentage (62/38) than post-election years.  The average rate of return is higher as well, although the average and median annual returns (+7.0% and +6.2%, respectively) are both below the long-term annual average of roughly +9%.  Also, much like the Post-Election year, the Mid-Term Election year tends to experience large price movements.  The annual Mid-Term year has posted a gain of +10% or more nine times and a loss of -10% or more four times.   (Figure 3).  It is also worth noting that, even though the mid-term year has only been down 38% of the time since 1933, some of the losses were quite substantial, including -16.8% in 2002, and -27.6% back in 1974. 

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Figure 3

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