Does The Market Care Who Wins The Election?
February 2, 2012How can you tell what year it is without a calendar? Just turn on the TV. If you’re assaulted by political attack ads and televised talking heads pushing their partisan agendas, it’s an election year. This year, with the Office of the President up for grabs, the contention has reached new highs:
- The Democrats claim that Barack Obama simply didn`t have enough time to implement his agenda. He needs is another four years to bring his vision of hope and change to the United States, his supporters say.
- The Republicans are adamant that Obama failed during his tenure in office, and thus it`s time that the GOP takes over to fix the economy and the damage done by the Democrats.
- Meanwhile, outsiders like Ron Paul are pushing to turn the system upside down and start over again.
This soap opera plays out every four years in the United States. The various sides battle for the hearts and minds of the public by sowing fear of economic catastrophe if they don`t win. Obvious, history tells us this is not the case. Just what is the truth about the presidential election and the stock market?
Volatility is the rule
While the market generally becomes more volatile during hotly contested election years, the S&P 500 has fallen only 3 times since 1928 during an election year. 2008 was a case in point, when the S&P 500 collapsed over 30%. However, history supports a higher stock market during election years.
History also shows that the volatility leading up to the election is due to the unknown factor about the election, not due to what political party is in the lead. Stocks hate uncertainty, even if it`s over something that doesn’t matter in the long run. The uncertainty is what causes presidential election year volatility.
“Common sense” is debunked
Common sense would seem to dictate that the stock market should perform better under a Republican president than a Democratic one. This is due to the (supposed) lower-taxes, pro-business position of the Republicans and the (supposed) anti- business, high-tax stance of the Democrats.
However, like most dealings in the stock market, the truth doesn’t bear out this “common sense.” In reality, stocks have performed better, on average, during Democratic administrations than Republicans ones. The statistics make it more clear:
- The average annualized returns for Bush 1, Eisenhower, Bush2, Reagan, Ford, Hoover and Nixon is 0.4%. Take out the 30% decline under Hoover as an outlier and the average return is 4.7%.
- The average annualized return under the Democratic administrations of Clinton, Truman, Johnson, Roosevelt, Carter and Kennedy was 8.9%.
And in the end … it doesn’t matter
Long-term statistics aside, for active traders it really doesn`t make a difference who wins the Presidential election this year. However, the election cycle supports a positive close on the year. Analysts are expecting 2012 to be an excellent year for active traders as well as longer-term bullish swing traders.
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