There’s only so much a U.S. president can do to improve the performance of the stock market, but that doesn’t keep people from connecting the highs and lows with the person sitting in the Oval Office.
Regardless of party, the markets have traditionally improved during election years. Eighteen of the 22 election years since 1928 have yielded positive returns.1 The average return of the S&P 500 is 12.6 percent when the incumbent is up for re-election. However, in years like 2016, when the president is on the way out, the S&P 500 actually drops an average of 2.8 percent.2
Another variable to consider is who is in control of Congress during a presidential election year. One market analyst crunched the data to reveal that when Republicans controlled Congress, the S&P 500 averaged 19.7 percent. In years with a split or Democrat-controlled legislature, the S&P 500 averaged 7.6 percent and 3.2 percent, respectively.3
Election years pose unique challenges. One political party is always quick to point out the negative effects the other may have on the nation’s financial situation. The winner of the election may not determine how stocks perform, but some market observers have theorized the market can actually predict the outcome of a presidential election.
If the stock market posts gains in the three months before Election Day, the candidate from the political party already in the White House has a very high probability of winning. In contrast, the party trying to retake the Oval Office has a better shot if stocks tumble.4
Clearly, politics do play a role in influencing the stock market. However, it is important to not make financial decisions based on election predictions and historical returns of election years, as they are not an indicator of future results. It’s also important to work with a financial professional to develop a financial strategy designed to help you work toward your particular goals. Please give us a call if we can help you with that.
1 Columbia Threadneedle. Spring 2016. “Politics, Stocks and Your Portfolio.” https://www.investor.columbiathreadneedleus.com/content/columbia/pdf/SPRING-2016_NEWSLETTER.PDF. Accessed Aug. 5, 2016.
2 Merrill Lynch. March 10, 2016. “How Presidential Elections Affect the Markets.” https://www.ml.com/articles/how-presidential-elections-affect-the-markets.html. Accessed Aug. 5, 2016.
3 William Watts. Marketwatch. Dec. 29, 2015. “2016 predictions: What presidential election years mean for stocks.” http://www.marketwatch.com/story/2016-predictions-what-presidential-election-years-mean-for-stocks-2015-12-29. Accessed Aug. 5, 2016.
4 Adam Shell. USA Today. July 26, 2016. “Stocks could predict who wins White House.” http://www.usatoday.com/story/money/markets/2016/07/25/stocks-predict-who-wins-white-house/87440314/. Accessed Aug. 5, 2016.
Content prepared by Kara Stefan Communications.
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