The Stock Market and Election Years

Dispelling myths of investing in an election year

Just because it's a presidential election year should not mean that you have to run for the hills because you think the market will crash. If you base your investment decisions on emotions, that could be a mistake so first let's look at history and see what the data shows in a presidential election year and see if this myth can be busted.

Putting it to the test

There have been 24 presidential election years since the S&P 500 Index began in 1928 and according to First Trust, of those 24 election years 20 of them have been positive. In other words 83% of the time presidential election years have been positive, only four years were negative. In 1932 and 1940 during the Great Depression under Roosevelt and in 2000 during the bubble crash under Bush and in 2008 with the Great Recession when Obama was elected. In all Presidential election years since 1928 the average return of the stock market as measured by the S&P 500 Index, was 11.58%.

So if 83% of the time during an election year it was positive with an average return of 11.58%, then to say that stocks do not do well in an election year well I think we can safely say that myth is busted.

Now markets may be more volatile during the an election year especially leading up to voting day with an average draw down of 17.7%,  according to JP Morgan but typically when results are announced markets tend to Rally because there is more clarity.

What if my candidate doesn't win?

What about the notion of, if one candidate wins over the other will markets crash?  

Well  according to JP Morgan as this chart shows on average since 1984 markets have been higher 12 months later regardless of who won in fact in the last 40 years only one time in the following 12 months of an election did the market go down. 

So to say if one candidate wins over the other, the markets will crash then I think that myth is busted. So there you have it in black and white with history and data and obviously historical performance is no guarantee of future results but while history may not repeat itself it often times Rhymes and in my opinion I think what drives the market more than election years is really just the macroeconomic environment like inflation, interest rates and earnings growth.

   Keith Wilson

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC