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Presidential Elections and Stock Market Cycles

Presidential Elections and Stock Market Cycles

As all of the rhetoric heats up and the two largest political parties begin to duke it out heading for the November election, let's take a look at the historical stock market reactions to the unavoidable presidential election cycle. Since the 1970's, when we spiraled upward on the inflation scale to surpass 15% annual inflation rates and interest rates of 18, 19, 20% on 90 day treasury bills and short term certificates of deposit, the economy has been the leading driver in terms of election results. Over the last 40 years, some significant patterns have emerged.

Most notable of these patterns is that the first two years of a new president's administration usually result in lower or underperforming stock market results. The third year and into the final year of the first term generally are very good periods for stock market performance. In fact, in the years from 1946 through 2009, 62 percent of the American economy’s growth came during the final two years of presidential terms, compared with 38 percent in the first two years. A third of the growth came in the fourth years.

With a third of the growth coming in the fourth year of a presidential term, the chart below depicts investment returns (based on the S&P 500) for the election years since 1928. In my opinion, the best that can be said is that the results are interesting. While returns have been generally favorable, in recent years there have been some uncharacteristically bad results. In 2000 and in 2008, the declines would have eaten up all the gains since 1980. As stated already, it is however very interesting.

   Stock Market Returns
   During Election Years (based on S&P 500)

Year

Return

Candidates

1928

43.6%

Hoover vs. Smith

1932

8.2%

Roosevelt vs. Hoover

1936

33.9%

Roosevelt vs. Landon

1940

-9.8%

Roosevelt vs. Willkie

1944

19.7%

Roosevelt vs. Dewey

1948

5.5%

Truman vs. Dewey

1952

18.3%

Eisenhower vs. Stevenson

1956

6.5%

Eisenhower vs. Stevenson

1960

.50%

Kennedy vs. Nixon

1964

16.5%

Johnson vs. Goldwater

1968

11.1%

Nixon vs. Humphrey

1972

19.0%

Nixon vs. McGovern

1976

23.8%

Carter vs. Ford

1980

32.4%

Reagan vs. Carter

1984

6.3%

Reagan vs. Mondale

1988

16.8%

Bush vs. Dukakis

1992

7.7%

Clinton vs. Bush

1996

23.1%

Clinton vs. Dole

2000

-9.1%

Bush vs. Gore

2004

10.9%

Bush vs. Kerry

2008

-37%

Obama vs. McCain

2012

?

Obama vs. ?

One strategy stands out as having been overwhelmingly successful has been to hold stocks only in the last half of the third year into the first half of the fourth year of any presidential term. I cannot confirm that anyone has used this strategy, however on paper it has yielded tremendous returns, and insured that investors were "out of the market" during the majority of losing years. The problem is that very few have the discipline or the wherewithal to pursue such a strategy. Brokerage firms certainly would not condone this approach as they would be without commissions for 3 years out of 4!

The point of looking at this approach and the phenomenon of market returns compared to presidential elections is to highlight the behavioral science aspect of investing. The concepts of herd mentality or blind leading the blind may be too harsh, but not at all unrealistic in describing what happens during these times. There is also the very real aspect of an incumbent president seeking reelection choosing to use any economic stimulant at his disposal in order to conjure up the appearance of a well functioning economy to help insure such reelection. This is made most evident when we see the dismal economic performance that has so frequently gone hand in hand with the first two years of each presidential term. Once elected, get back to the platform and don't worry so much about economic growth.

There will always the search for the magic bullet that presents the best of all worlds to the investor. Nonetheless, a long term strategy based upon the main fundamentals of earnings growth, new products and services, and continuously building the customer base will always win out in the long run. It may be a good strategy to look beyond the recent run up in stock market prices, and seek only those shares with the proven ingredients for a sustainable upward price movement.

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©Patrick J. Catania 2010
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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