Stock the Vote: Do Presidential Elections Affect Markets?

This is a guest post from Matthew  Carvalho, Director, Investment Research at our partner Loring Ward.
With the 2012 political conventions for both Republicans and Democrats just beyond us, there’s no doubt that the Presidential Election year excitement is hitting its peak. When it comes to the stock market, you may even see headlines noting that Presidential election year returns are often abnormally high.  But have election years really been the best time to invest? Across all Presidential elections since 1928 the average return on the S&P 500 is 11.02%.1 Sounds like a strong number until you consider the average return over the entire time frame of 1928 to 2011 was actually slightly higher at 11.46%!2
So how did this myth begin? From 1928-2000, only two Presidential election years saw negative returns, meaning that about 90% of the years saw positive returns, averaging nearly 15%!2
Secondly the second half of the four year Presidential cycle tends to see strong returns, not necessarily just the last year. On average the first two years see gains of 8.54%, while the last two years average 14.39%.2

Looking at the data we must conclude that savvy investors should only stay invested during the third and fourth years of the cycle and remain on the sidelines the rest of the time, right?  Wrong. 

It’s easy to find patterns in large amounts of statistical data. Yet patterns are only helpful if they can be relied upon to continue.  Investors who believed whole-heartedly in the election cycle theory would have been extremely disappointed with several of the recent election year results — a loss of 37% in 2008 and 9% in 2000.  What had previously looked like a surefire bet is now indistinguishable from the long-term average.
Risk and return are related; nobody is able to predict market returns in advance. Yet some investing maxims stick round past their prime. Capitalism and the capital markets have proven to be strong wealth creators in the long term, stronger than any coincidences related to a small sample set of political election results. Investors with a long time horizon should not try to outthink the market, but instead enjoy stock market gains whenever they occur.
  S&P data are provided by Standard & Poor’s Index Services Group. The S&P 500 (Standard & Poor’s 500 Index) is a broad-based US equity index. The S&P 500 Index is an unmanaged market valueweighted index of 500 stocks that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company’s influence on the index performance directly proportional to that company’s market value.
Indexes are unmanaged baskets of securities that are not available for direct investment by investor. Their performance does not reflect the expenses associated with the management of actual portfolios including, but not limited to tax deductions and management fees.  Past performance is no guarantee of future results, and values fluctuate. All investments involve risk, including the loss of principal.

1United  States Elections Project

2Data Source: DFA Returns 2.0

LWI Financial Inc. (“Loring Ward”) is an investment adviser registered with the Securities and Exchange Commission. Securities transactions may be offered through Loring Ward Securities Inc., an affiliate, member FINRA/SIPC. R 12-326 (Exp. 8/14)

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