What Will the Stock Market Do This Election Year?
It's not uncommon for financial advisors to be asked this year: "Should we do anything different with my portfolio given it's an election year?" Luckily, this has been so well researched that it's not difficult to find good data on the subject.
Many in the financial services industry like to reference the early century research of Marshall D. Nickles, EdD, a Pepperdine faculty member that authored a paper called "Presidential Elections and Stock Market Cycles." Nickles successfully made the case for a cyclical nature between politics and the stock market. His paper says, "Because of the consistency and predictability of administrative actions and campaign rhetoric and their anticipated influences on the economy, investors have come to assume better times for business conditions, corporate bottom lines, and stock prices in the period prior to a presidential election and a less robust period following those periods." In addition to robust election-year returns, Nickles also identified that "during the entire 20th century, every mid-decade year that ended in a '5' (1905, 1915, 1925, etc.) was profitable."
So, do we invest on the 5s during presidential elections, the moon cycles or even the Super Bowl results? No, we invest based on our risk tolerance, goals and objectives. We invest the boring, old-fashioned way. We develop a plan, tweak the plan along the way and understand that investing is a marathon; sometimes a very emotional marathon.
Investors, whether experienced or inexperienced, love to look for something to hold onto. Cycles, trends, patterns – anything that will give them insight into what they can expect out of the market and their investments. After all, our investments are our money. We care about our money. So, to answer the question, the general domestic stock market (as tracked by the S&P 500) has fared very well in most election years since 1928. As a matter of fact, research shows that there have only been three elections years (1940, 2000 and 2008) that posted negative results.
Based on the facts and historical patterns, there is a very probable statistical chance that this election year will turn out like so many others: a good year for stocks. Since 1928 there have been 21 presidential election years, not including 2012. Out of those 21, 18 have returned positive results for the S&P 500 – 12 of those 18 have posted double digit returns. That is hard information to argue with.
It makes sense that election years are good for the market. Some analysts even argue that incumbents will do whatever they can (cut taxes, stimulate the economy, change administrative policy and spending habits) to make the American people feel good as they show up on voting day. A weak economy as evidenced by a weak stock market during an election year can bode tough for a sitting president. As a result, there is a lot of conjecture in the media about standing administrations during presidential elections wanting – even needing – people to believe that all will be well and it is due to their efforts so they have a better chance of getting re-elected.
At the end of the day, the monetary policy, the state of the economy and the financials of corporate American have more of a role on the market than the election cycle, but the data is useful, interesting and hard to argue with.
I am not a believer in, nor a supporter of, market timing so trying to time any cycle, whether election years or moons, doesn't mean a lot to me. I tend to side more on that boring, old-fashioned front of diversified portfolios filled with high-quality investments that are monitored, rebalanced and carefully-watched. That is a pattern we understand and that works.
Kelly Kazmierski is a financial advisor with fee-only Registered Investment Advisor, Legacy Financial Services Group, LLC. She specializes in actively-managed portfolios for retirees, business owners and small business 401(k) and profit sharing plans. She can be reached at firstname.lastname@example.org or at 231.933.0631.