June 2016 Newsletter
Election Year Market Performance
In This Month’s Issue:
We examine some historical data in an attempt to determine if there are any discernible trends or correlations between elections and market performance.
As the primary season winds to a close and the general election match up comes in to focus, we want to examine some data and attempt to determine if there are any discernible trends for history to help us portend the market’s behavior in the second half of the year. While it is important to note that election years do not occur in a vacuum and there are always a multitude of economic factors at play in determining market performance, various studies have produces some interesting sets of data.
First, we can set the table if you will and look at the big picture since 1928:
Figure 1 – S&P 500 Performance 1928 – 2014
At first glance, the noticeable outperformance in pre-election years is remarkable and election years themselves appear about average. Source: Investment U, the Oxford Club, March 2015.
The first thing that jumps our is the obvious outperformance in pre-election years. This makes some intuitive sense as presidents tend not to introduce many major new initiatives in the last year of a term that could roil markets and the effects from their early year programs have had time to be digested and priced in. Obviously, 2015 was a notable exception to this average.
The election years themselves appear to be in line with the average of all years, but digging a bit deeper will reveal some considerable spread depending on what kind of an election year we are talking about. (Figure 2)
Figure 2 – S&P Performance 1928-2014
Separating out the years in which a new president must be elected reveals a double digit deviation from the average of all years, certainly statistically significant.
Again, this makes sense. If there is one thing that investors generally don’t like, it is uncertainty. Historically, when you have an unknown quantity on both sides of the aisle the market has responded negatively. Since 2016 is one of those years where we must elect a new POTUS, the trend may not be in our favor.
Now, to flip the question around; is there anything that market performance can tell us about the outcome of an election? (Figure 3)
Figure 3 : Highlighting Market Performance vs. Election Outcome
Source : John Hancock Investments. Dow Jones Industrial Average Data 1900-2015.
What this chart says to me is that the state of the economy, translated at least partially through stock market performance, has an effect on the electorate when deciding whether or not to oust the party currently in power. It also says that regardless of who wins the presidency, the post-election year performance levels out as some certainty returns to the government.
Finally, we will take a look at the intra-year returns and determine if there are any changes in the average seasonality. Let’s compare the average monthly returns for all years from 1932-2014 (Figure 4) against the average monthly returns in election years over that same period. (Figure 5)
Figure 4 : Average Monthly Returns, All Years 1932-2014
Source : Market Realist, Haver Analytics
Figure 5 : Average Monthly Returns, Election Years 1932-2014
Source : UBS, Thomson Reuters, Bloomberg
The notable difference occurs in the second half of the year, where in election years, the typical strong summer seasonality is almost double than the average for all years. As the party tickets are solidified and the certainty of those choices sets in, the market tends to outperform the average. We can also see that the typical strong end of year seasonality is tempered in election years, while investors digest the implications of the winner on the economy.
It would appear that these studies confirm what may seem like an obvious truth, investors like certainty and tend to be cautious in times of uncertainty. While these studies don’t necessarily mean much for long term investors, the anecdotal evidence presented here could certainly be of interest to tactical managers and traders. However, it is important to understand that correlation does not imply causation and that every year and every election cycle is different, regardless of historical trends.
Important Disclosure Notices
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
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