Election years have traditionally been market-friendly, but that doesn’t mean you should base your portfolio decisions on politics. AS we head into the 2012 Presidential election in earnest the topic of elections cycles and the markets comes up.
Those with a close eye on the stock market are always on the lookout for correlations that might help them take advantage of the next market cycle. With an election year approaching – a time that has boded well historically for equities – you may question whether or not political races should affect your investment strategy.
Since 1928 there have been 21 Elections Markets have been up 18 of those years. From 1900 – 2010 the Dow Jones Industrial Average has had an average return of 7.5%. Pre-election years in particular have produced an average annual return of 11.3% since 1900 (Source Ned Davis Research).
Numerous studies show that the stock market has tended to perform well in the two years leading up to a presidential election. While substantial evidence suggests that the market does go up more often than not in election and pre-election years, it is my belief that relying on this trend is not a good way for long-term investors to pursue their goals.
Though the data appears to demonstrate a reasonable correlation between the election cycle and the market’s performance, this does not necessarily prove that one event has always caused the other. It could be coincidence. Nevertheless, various theories have attempted to explain why the stock market might be sensitive to the political seasons.
One popular theory suggests that the incumbent party leverages economic policies to give the market a slight nudge just before election time, then allows the market to appropriately correct itself once elections are over. Another theory proposes that investor confidence tends to rise based on the lofty promises of candidates vying for office, then tapers off as some of those promises fall by the wayside.
Regardless of which theory, if any, you choose to believe there are a myriad of factors that affect the markets and isolated factors such as political elections never explain the whole story.
It’s also important to note that there have been a few major exceptions to this trend in the past – 1987, a pre-election year, saw the worst market crash in U.S. history and in 2008 we saw a decline of almost 38%. 2011 isn’t shaping up to have stellar returns either.
While it may be academically interesting to look at election cycles and market performance is it is clear that investment decisions shouldn’t be based solely on any theory. Investment decisions should be based on sound fundamentals, and, most important, your individual goals and circumstances. As always please contact us with questions or to discuss you personal wealth management vision and objectives.
The Dow Jones Industrial Average is an unmanaged index of 30 widely held U.S. companies commonly used to measure stock market performance. Investors cannot invest directly in the Dow Jones Average. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Past performance is no guarantee of future results.
