How 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:
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:
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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