Presidential election years can be among the most volatile for the stock market, according to historic number-crunching on the subject. That can put added impetus on retirees and investors nearing retirement to huddle with their professional advisor to assess and strategize for the added market noise that can flare up in an election year.
“Wall Street doesn’t like uncertainty and the last year of a presidential term is full of uncertainty because we don’t know who’s going to be the next commander in chief,” says Sam Stovall, managing director of U.S. equity strategy for S&P Capital IQ, who has crunched the numbers going back to the turn of the 20th century. “Whoever does get elected is an untried entity. As a result, uncertainty is injected in the investor mindset.”
This year, and most years, elections are a single piece of this year’s madcap market puzzle, according to JJ Kinahan, chief strategist for TD Ameritrade. “This year may be more volatile than normal given this start,” Kinahan says. “With so much uncertainty in the oil market and so much uncertainty around what the Federal Reserve will actually do [regarding continuing to raise interest rates], the presidential election is adding a lot to the equation.”
The proof in the election-cycle pudding could come later in the year, from August to October when investor trading reacts to a better reading on who could next inhabit 1600 Pennsylvania Avenue (and what congressional make-up could meet the incoming president).
To be sure, if 2016 ends with a deep dive in the markets, it’s not likely that the election can take the full blame, Stovall says. As Kinahan notes, oil appears to be the biggest culprit in the decline, and China’s economic woes aren’t doing global markets any favors.
Here’s what history shows us: Since 1900, the S&P 500 (SPX) has fallen, on average, 1.2% in year eight of an administration, like the one we’re in now. The stock market has moved higher only 44% of the time, according to S&P Capital IQ’s analysis (shown in red, below). Given SPX’s low double-digit decline in the first weeks of 2016, a 1.2% falloff may seem more like a stumble than a tumble.
Incumbents versus New Kids
Here’s how history converts the moves: If the stock market goes up in August-October of an election year, the incumbent party, in this case a Democrat, has typically been the winning party. If stocks retreat in that stretch, it could be because investors sense a replacement, in this year’s case, with a Republican or an independent. Remember, it’s not a partisan-related shift, it’s a past/present/future paradigm.
How does that yo-yo trading work again? Investors tend to feel they have a better grasp of the policies and attitudes with the incumbent party rather than the new kid on the block. That’s uncertainty that Wall Street doesn’t like.
History, again, is at work here. The incumbent party has triumphed 82% of the time that the markets have advanced during that three-month period. The replacement party has prevailed in 86% of the times that the market has retreated.
There’s correlating evidence from Yale Hirsch. He’s a market historian who founded the Stock Trader’s Almanac and is known to be responsible for such pithy lines as “sell in May and then go away” and the “Santa Claus rally.” His presidential election market cycle, developed in the late 1960s, follows similar patterns.
Another interesting Oval Office link to the markets: the compound annual growth rates (CAGR) of the S&P 500 during presidential tenures since 1945 average better for Democrats, at a cumulative 9.7%, than for the GOP at 6.7%. But the highest CAGR was during Republican President Gerald Ford’s term, at 18.6%.
Sector Intelligence, Too?
The history can help with sector drill-down. For example, Republicans tend to be less demanding of air-quality issues, meaning investments in beaten-down groups like coal, oil and gas exploration and production, or storage and transportation, might see renewed attention if it appears the GOP will reign.
If a Democrat looks to take control of the White House, sensitive stocks including health care, biotechnology, or pharmaceuticals, could be in the hot seat.
“Unfortunately, most candidates haven’t given us a very clear picture on what their platforms are,” Stovall says. “But once we get that, we can potentially tie that platform to particular industries.”
All this could make for some choppy trading in the next few months and even years, but Stovall says income investors might focus their concern less on share price fluctuations and more on the stability of annual dividends. That’s particularly true with investments in what’s called the “dividend aristocrats,” or those that have paid stockholders each and every quarter for 25 years or more. And it holds as true for young investors as it does for those in their golden years, he says.
Of course, this can all just be happenstance. After all, these statistics are history. There’s the caveat with this election-cycle trading as there is with any form of trading: past performance does not guarantee future results.
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The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.