Market Beat: Stock market election cycles
November 12, 2018
As I'm writing this, the mid-term elections are one day away, and I thought that it would be interesting to look at how the stock market has performed historically during election cycles.
One common election cycle that you may read about is the presidential cycle where the market tends to perform better in the years prior to a presidential election and not as well in the two years following the presidential election. This theory held true in the early to mid-1900s but has not held up through recent presidential terms.
The explanation was that the president would do what he could to stimulate the economy and the market in the year prior to an election. They weren't as concerned about market performance until they were getting closer to a re-election bid. The first year of their term was normally the worst for the market, but that hasn't held true for many years now.
Another theory that is commonly written about is that gridlock is good for the stock market. The reasoning is that if Congress is divided, they won't be able to pass any legislation that could have a negative impact on the economy.
If we look back at 60 years of market history, according to data from Investor's Business Daily, the stock market returns during a period with a divided Congress have performed the best with an average return of 18.7 percent over the two years following a midterm election. When Congress was controlled by the same party as the presidency the two-year returns were 17.3 percent. When the opposition party controlled both houses of Congress the two-year gains were 15.7 percent. On average the market gains have been pretty good regardless of which party is in power.
While many investors tend to prefer Congressional gridlock, so there's not a lot of change, one possibility from a gridlocked Congress is that politics may make it difficult for the government to react to a financial crisis. A unified government would have the ability to pass legislation that could be helpful in the event of another financial crisis, whereas a divided government may not be as willing to do so, due to the political implications.
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Of course, the Fed could react to a crisis with monetary policy as part of their mandate to maintain price stability and full employment, but Congress might not be very effective during times of political divisiveness.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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