Why the year before presidential elections are stock market winners

While we’ve been hearing about it for quite some time, the U.S. presidential election is now officially less than one year away. Kyle Jones, Financial Planner at Wamhoff Financial Planning & Accounting Services, has uncovered a few interesting facts about the correlation between presidential election terms and the stock market:

  • The pre-election year, or the third year in past presidential terms has historically been the best for stock returns when compared to post-election, mid-term, and election years.
  • This phenomenon was first described by Yale Hirsch, the founder of the Stock Trader’s Almanac.
  • The average annual stock market’s performance based on the four-year presidential cycle is shown below:
    • Post-Election Year – Average Return of 3.40%
    • Mid-Term Year – Average Return of 4%
    • Pre-Election Year- Average Return around 11.30%
    • Election Year – Average Return of 5%
  • In the Pre-Election Year – Since World War II, the S&P 500 Index has never suffered a loss during the third year of the presidential cycle. However it is worth noting, that in 1947 & in 2011, the stock market did not rally and ended virtually unchanged in both years.

What makes the 3rd Year of a Presidential Term Correlate Positively to Strong Historical Stock Market Returns?

  • The political party in power wants to remain in power and will do anything and everything it can to stimulate the economy and consumer confidence.
  • This is a pre-election year which is flirting dangerously with potentially being the first pre-election year where the stock market might finish the year negative since before World War II. Time will tell . . .

A few more historically significant facts to dispel myths that are perpetrated as facts about the presidential cycle and stock market returns:

  • It is a myth that Republican Presidents are better for stock market returns versus Democrats. During election cycles since World War II, the Dow Jones Industrial Average posted larger returns under Democratic presidents.
  • Historically stocks tend to perform better during periods of legislative gridlock, when presidential power is offset by opposition party controlling Congress.