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.