Are there any effects of the presidential elections on the stock market? On the one hand, the stock market is definitely cyclical, which enables investors to look to the past in order to detect trends and make forecasts. On the other hand, the cyclical nature of the market can be risky.
On the other hand, you can’t always depend on the returns of the future to match the returns of the past. Election years are not an exception, despite the fact that there are certain constant tendencies.
Election Years and Different Theories of the Market
According to the research that was published by Dimensional Funds in 2021, the market as a whole has shown positive returns just four times out of the total of twenty-four election years that have occurred between 1928 and 2020.
However, if you look more closely at the years in between elections, you’ll notice that year three of a president’s tenure is often the best year for the market, followed by year four, then the second, and then the first. This pattern continues until the end of the president’s term.
Yale Hirsch, the guy behind the Stock Trader’s Almanac, was the one who first proposed this “Presidential Election Cycle Theory.” It was expanded upon by Pepperdine professor Marshall Nickles, who presented data in a paper titled “Presidential Elections and Stock Market Cycles.” In it, he showed that one profitable strategy would be to invest on October 1 of the second year of a presidential term and sell on December 31 of the fourth year. Nickles’s research was published in a journal under the title “Presidential Elections and Stock Market Cycles.”
These investigations have brought to light a number of notable patterns, but this does not indicate that these patterns will always be there.
Examples from Recent Elections
These tendencies have been notably tested by recent events in history. These assumptions about the stock market were proven to be incorrect under the administrations of both Barack Obama and Donald Trump. During both of Obama’s stints in office, the first two years brought in far more revenue than the third year did. The first year was more profitable for Trump than the second year, before a significant increase in his third year, followed by the tumultuous markets of 2020. In 2020, the markets are expected to be volatile again.
The historical market data that investors used to try to time the markets throughout these presidential regimes was not relevant.
The market should have performed better in 2008 than it did in 2005 when George W. Bush began his second term as president and the S&P 500 Index rose 4.9 %.If you were to follow the theory that the fourth year of a term sees better returns than the first, then the market in 2008 should have seen better returns than it did in 2005. However, the number of votes cast decreased by 37.0 % in 2008, a contentious election year.During the period beginning October 1, 2006 and ending December 31, 2008, if you had followed the theory and invested in the stock market, you would have seen a decrease in the value of your money.
It is not always possible to anticipate a recession. Significant economic developments jolted the market and broke the norms that typically occur during election years in both 2008 and 2020.
The market is influenced by a great number of factors.
Investing based on data patterns like this is not a reliable method for making investment decisions, which is the main difficulty with this strategy. It is intriguing because it gives credence to a common misconception that there is a method to “beat the market.” Many people hold this view. However, there is no assurance of this. There are just too many other factors at play that contribute to the current state of the market.
In addition, the fundamental presumptions that constitute the basis of these ideas could not be correct either. They believe that the newly elected president will spend the first year of their office striving to fulfill the promises made during the campaign. It is anticipated that the remaining two years will be taken up with political campaigns and efforts to improve the economy. These presumptions might end up being correct in certain instances, but that is not always the case.
It is possible that it is preferable to invest in a way that is less thrilling but safer. This entails understanding risk and returns, diversifying your holdings, and purchasing low-cost index funds to own for the long term. This can be done regardless of who wins the election. According to the renowned economist and recipient of the Nobel Prize in economics, Paul Samuelson, “Investing should be more like watching paint dry or watching grass grow.” If you want to be entertained, you should take $800 and travel to Las Vegas.
Stock Market Returns During the Election Year
Here are the market results for the S&P 500 for every election year since 1928.
|S&P 500 Annual Stock Market Returns During Election Years|
|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||18.4%||Eisenhower vs. Stevenson|
|1956||6.6%||Eisenhower vs. Stevenson|
|1960||0.5%||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||7.6%||Clinton vs. Bush|
|1996||23.0%||Clinton vs. Dole|
|2000||-9.1%||Bush vs. Gore|
|2004||10.9%||Bush vs. Kerry|
|2008||-37.0%||Obama vs. McCain|
|2012||16.0%||Obama vs. Romney|
|2016||12.0%||Trump vs. Clinton|
|2020||18.4%||Biden vs. Trump|
Questions That Are Typically Asked (FAQs)
Which of the presidents had the best performance in the stock market?
Overall, President Bill Clinton had the best stock market performance since Calvin Coolidge on the S&P 500, and the best performance on the Dow Jones Industrial Average (DJIA) since Franklin D. Roosevelt. During President Clinton’s tenure, the Dow Jones Industrial Average rose 15.94 %, while the S&P 500 rose 15.18 %. The performance of President Barack Obama was rated as the second-best. During his presidency, the DJIA increased by 12.10 %, while the S&P 500 increased by 13.84 %.
How would you assess the performance of the stock market while President Trump was in office?
When it comes to the S&P 500 and the DJIA, President Trump finished in third place, after President Clinton and President Obama. During his administration, the DJIA had a gain of 11.77 % and the S&P 500 saw an increase of 13.73 %. However, during President Trump’s tenure, Nasdaq had the most growth, rising by 24.17 %. This was the largest gain of any president.