By Michael McKeown, CFA, CPA - Chief Investment Officer
Both the four-year presidential term and the stock market follow an interesting pattern.
As soon as the midterms are over, get ready… It will be time to gear up for the 2020 Presidential Election. The Democratic party will be looking for its candidate. The Republican administration will do what every incumbent seeks to do, stimulate the economy to please the market and keep people employed. If people feel good about the economy, they are much more likely to vote for the party currently in power. That is why you hear talk of more tax cuts and an infrastructure spending bill. Right or wrong, putting more money in the system primes the economic engine.
When looking at the stock market, Year 3 of the Presidential cycle stands out.
Going back to 1928, the stock market’s average annual returns for presidential terms are as follows: Year 1 is 4%, Year 2 is 4.5%, Year 3 is 13.5%, and Year 4 is 7%. Our data series goes back to 1964 and shows the average presidential cycle (magenta line) compared to the last election in November 2016 (neon green line). This cycle clearly still runs ahead of the average, so perhaps we pulled forward part of the typical Year 3 returns.
Averages can be misleading. Below shows the high and low range for the S&P 500 for all the presidential stock market cycles since 1964.
The stock market volatility, length of the long bull market run, high valuations and the political uncertainty, have many people turning bearish. These are not great reasons for selling stocks by themselves, because the risks may already be priced into the market.
The below tables show the 6-month performance periods of the S&P 500. The second column is the return leading into October of midterm elections, while the following column is the 6-month returns the following November 1st to April 30th. In four of the last 13 midterms, the economy was going through a recession. Naturally coming out of those periods, stock markets turned up as signs of economic expansion were ahead. The median 6-month return during these periods was up 17% with the worst being up 3%.
In the next table, we throw out those four recession observations below since they skew the results (and the U.S. economy is clearly not in a recession today). Even without those, all nine times the market was up with a median return of 15%. In eight of the nine observations, the market outperformed its results from the prior six months.
In the prior six months until October 29th, 2018, the stock market followed a similar pattern to history. It was down less than 1%, while in the past the median performance going into mid-term elections was up 3.6%.
Uncertainty surrounds elections. However, an election being over in and of itself, can be a positive catalyst. Whether it was the “Brexit” vote in the U.K., the U.S. presidential election in 2016, or the French election in 2017, stocks did well over the subsequent period in each of these countries. History does necessarily not repeat itself and some may also point to the small sample size. Still, the presidential cycle has been a nice guidepost in the recent past for what could happen following midterm elections.
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