How Presidential Elections Affect The Market

Marshall Rathmell |

 

I have heard several people in the past, and recently, make statements to the effect of “I’m going to hold off until after the election before I make any moves.”  Recently when I heard someone say this, it got me thinking…how do markets react during and directly after U.S. presidential election years? Here is what I found:

  • S&P 500 Index (1928-2013):
    • Average Return During Election Year = 11.2%
    • Average Return Subsequent to Election = 9.3%
  • MSCI EAFE Index (1972-2013):
    • Average Return During Election Year = 6.5%
    • Average Return Subsequent to Election = 13.5%
  • MSCI Emerging Markets Index (1988-2013):
    • Average Return During Election Year = 2.7%
    • Average Return Subsequent to Election = 33.9%
  • Barclays Capital US Aggregate Bond Index  (1976-2013):
    • Average Return During Election Year = 7.8%
    • Average Return Subsequent to Election = 8.0%

As stated, the above figures are averages.  The individual annual returns, for both election years and the year subsequent, were all over the board.  Sometimes the returns in an election year and the year immediately following were both either positive or negative, and at times they moved in the total opposite direction (sometimes significantly). I’ll use the S&P 500 Index Returns as an example:

In summary:

  • It is difficult to identify a consistent and systematic return pattern in election years and the year immediately following.
  • On average, from the 1928 election between Herbert Hoover and Al Smith to the 2012 election between Barack Obama and Mitt Romney, market returns have been positive in both election years and the subsequent year
  • It appears market expectations associated with election outcomes are embedded in security prices

This information speaks to how very specific events have affected market returns in specific years, but I think it paints a bigger picture than that. I believe we can learn a lot from this exercise and that the point this drives home, in my opinion, is that while people tend to try and predict short term market performance based on forward looking occurrences, the market is extremely hard, if not impossible to predict consistently. Obviously, past performance is not a guarantee of future results, but I believe another lesson we can draw from this information is that over the long term, markets are efficient and productive if distractions are ignored. 

-Jay McGowan-

 

Some of this information was provided by Dimensional Fund Advisors, and the S&P data is provided by Standard & Poor’s Index Services Group.