A frequently asked question these days is “What’s the election going to do to the stock market?” Understandable considering how much coverage the presidential race gets. And also considering the already volatile markets. The news will inevitably predict the end of the world as we know it. But that’s what sells newspapers (or blogs or whatever people use to get their news these days).
There is such a “thing” in finance known as the “Presidential Election Cycle Theory”. It basically says that U.S. stock markets are weakest in a new president’s first year and then improves until the next election.
This theory more or less held its own during the early to mid 1900’s, but has been disproved in more recent years (George H.W. Bush’s first term and both of Bill Clinton’s terms).
One report showed that the S&P has posted a positive gain in 76% of election years. A good reason not to bail out. Not that past results are indicative of future results (Hi compliance department!).
I figured Republican presidents would have been better for stocks. Apparently that’s not true. Since WWII, the Dow has posted bigger average returns under Democratic presidents, according to the Stock Trader’s Almanac.
Jeffrey Kleintop, chief strategist for LPL Financial, says stocks tend to do better in periods of legislative gridlock, when presidential power is offset by the opposition party controlling Congress.
So based on this limited amount of data and history, our best case for a rising market would be a Democratic president with a Republican controlled Congress.
While the president can have an impact on the economy and therefore the market, it’s hard to make any 1 to 1 correlations. So just some history and insight. Certainly no predictions here.
Kirk B. Reed, CFP®
CERTIFIED FINANCIAL PLANNER™