Tahoe-Truckee Market Beat: The Presidential Election Cycle
September 13, 2016
There has been quite a bit of research done on the impact of presidential elections on the stock market.
There are some studies that show the first year of a new president's term is typically one of the worst for the markets, the second year is a little bit better, and the market performs the best in the third and fourth years of the cycle.
The theory behind that is pretty simple. When we have a new president, he or she is likely to implement policy changes in the first years in office, and the president is not as concerned about getting reelected or helping his or her party win the election. The latter years of the term show more concern about the next election.
Charles Schwab recently did a study that went back to 1950. Their analysis found that election years are normally positive for the market with an average return of +6.6%. The study included the worst election year ever, McCain vs. Obama in 2008, when the market dropped -37%. There have been 13 positive election years since 1950 and only three negative ones.
The first year following an election posts an average return of 6.5%, with nine of those years having positive returns and seven negative ones.
The next year has an average annual return of 7.0%, with 11 of those being positive and six putting up negative results. The last year of a president's term has typically been the best, with an average annual return of 16.4%. There have been 15 winning years and only two losing years in the study going back 66 years.
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The best performing sectors in election years have been Financials and Utilities and the worst have been Information Technology and Telecommunications.
Information Technology has also been the best performing of all the sectors throughout all four years of a presidential cycle in the last year of a president's term by posting an average return of 36.1%.
The S&P 500 is up about 5% year to date, so we are seeing just about average performance for the market so far this year when compared to the average election year.
This year's election will be an interesting one to follow as the outcome could have an impact on certain sectors and industries. Investors might want to be prepared for some stock market volatility around the time of the election.
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.