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Should You Change Your Investment Strategy for the Elections?

Should You Change Your Investment Strategy for the Elections?

Ron Kelemen - Thursday, June 09, 2016

This wouldn’t be a presidential election year if we weren’t frequently asked, “Should I invest now? Wait until after November? Retreat to cash until 2017?”  In addition, it seems that everyone wants to know how the election results will affect the stock market.  This year is no different, except there seems to be more partisanship and anxiety due to current political developments.  Partisans on opposite ends of the political spectrum are predicting doom and gloom if their presidential candidate and political party aren’t elected.  Even those in the middle are wondering the same and potential changes to and within the Republican party add a new twist to historic data.

Looking at the averages since 1928, presidential election years have produced an average S&P 500 annual gain of 7% versus 7.5% for all years, excluding dividends. In other words, presidential election years have been pretty average.[i]  

However, that doesn’t tell the whole story.  In election years such as this one in which a new president must be elected, the S&P loses 4% on average.[ii] The end of the Bush II term, however, greatly skewed this number downward as the S&P 500 Index declined -36.55% in 2008, excluding dividends.  Major economic events beyond anyone’s control in 2008 were obviously stronger forces on the financial markets than whether or not it was the eighth year of his presidency.  Take 2008 out of the calculations, and the results are more like a typical year. 

What about after the election? 

On average, the first year of a new presidential term sees the markets rise by 6%[i].  That's below the 7.5% average for all years going back to 1928 and excluding dividends, but still a positive signal that the country has survived its latest election drama intact.

Which political party is better for the markets? 

Conventional wisdom suggests that Republicans, who are supposedly more business-friendly than the Democrats, would be more beneficial for the stock market. In fact, looking back to 1900, Democrats have been slightly better for stocks, with the Dow up an average of nearly 9% annually when the Democrats were in control, compared with nearly 6% per year during Republican administrations. But normal variations in annual stock market returns dwarf that difference.[ii] (See the heading “It’s us—not the politicians.”)

Is a divided government better for stocks? 

Except for the two years following 2010 and 2012 elections, it is not, according to a study by InvesTech that looks back to 1928.  When the House and Senate are divided, the S&P 500 averaged just 5.5% for the two year period after an election.  When one party controlled the White House and both houses of Congress or just both houses, the two-year post-election averages were greater than 15%. 

Our bottom line is this:  the financial markets don’t mind the election outcome, but they dislike the uncertainty and all the negativity the election season engenders. This year, the uncertainty is greater than usual, so expect more volatility.  After the election, things should settle down. 

[i] Stephen Suttmeier, Bank of America Global Research

[ii] Russ Koesterich, chief investment strategist at BlackRock

[iii] Belski, BMO Capital Markets

[iv] Belski BMO Investment Strategy Group, Bloomberg

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