How Will our Presidential Election Affect the Stock Market?

November 20, 2015 | Print View

While there are several cycles that can affect the stock market, the presidential term cycle is one that is highly likely to affect the US stock market positively in the coming year.

Many indicators of where we are in a cycle and where we are headed have been proposed over the decades, but most lack logic, i.e., skirt hemlines or the outcome of a major sporting event. On the other hand we have economic cycles, interest rate cycles and political cycles. These are the most often discussed and best documented.

Politics will be front and center in the media and daily conversations over the next twelve months (as if they haven’t been already). Just as the field of candidates will be narrowed down from 15 currently to 2 major candidates, so too will the field of topics and promises be narrowed down between now and the end of July.

Between now and next November, there will be many vows to improve our economic and social wellbeing. Importantly, this includes pledges to strengthen the flow of public funds into local economies since people tend to vote with their wallets.

Republican or Democrat – will the winning party in a presidential election determine how the stock market will move? No, based on historical data. A US Federal Reserve study found that, going back to 1852, superior risk-adjusted US stock market returns one year following a presidential election cannot be linked to a specific political party win. Given this, it would be wise to keep politics disconnected from your portfolio.

However, the stock market has gone up during a presidential election year 95% of the time.

Further, a win by the incumbent party would increase the likelihood of a positive year in the markets.

As seen in the chart below, the median return for the stock market in the election year was a handsome 10.4 percent.

To get even more specific, the last seven months of an election year almost always boost stockholder portfolios, with the market up in all but two election years post-World War Two.

Further, volatility declines over the course of a presidential term generally, with the fourth (election) year the least volatile of all.

Conversely, one could use the stock market to predict the election since:

gains in the S&P 500 stock index in the three months prior to the election have been closely tied to the reelection of the incumbent party

declines in the market during that same time period has resulted in a new party in the White House nearly 90% of the time

Given the historical outperformance of this upcoming election year, investors should consider the Gradient 50 or Gradient 33 portfolios. These would provide the maximum stock exposure in US markets. The Gradient 50 should also provide some downside protection due to its above-average dividend yield.

Conclusion: While the presidential cycle theory is not guaranteed, it is a positive indicator based on historical data. Volatility has previously dropped over the course of a presidential term. Markets are always affected by a number of dynamics every year, and this will be the case in 2016 as well. Our expectations include an improving economy, improving earnings growth rates and a rising stock market next year. The presidential election could prove to be another tailwind.

As of November 19, 2015

Dow Jones US Moderately Conservative Index is up 1.03% (TR) for the year

Down Jones Industrial Average closed at 17,732.75, up 1.73% (TR) for the year

S&P 500 closed at 2,081.24, up 2.99% (TR) for the year

MSCI Emerging Markets closed down 12.46% for the year

US 10 year Treasury Futures are yielding 2.23%, up 0.06% for the year

WTI Crude Oil futures closed at $40.54, down 24.5% for the year

To expand on these market reflections or discuss other portfolio strategies, please don’t hesitate to reach out to the Gradient Investment team.