Economy, Not Election, Drives the Stock Market

As we get closer to the upcoming presidential election, you may see or hear news stories about how the stock market behaves in an election year. As a result, you might be tempted to start thinking about how to rearrange or even change your investment strategy around this time. But before you make adjustments based on who might occupy the Oval Office, you may want to take a look at how the stock market has performed historically following election years.

Starting with the 1864 election and leading up to the first presidential election of this century in 2000, information in Yale Hirsch’s Stock Trader’s Almanac indicates the following:

• The stock market shows no pattern in post-election years. The post-election year from December to December has seen the market advance 17 times and decline 16 times.
• The market has not played favorites with political parties. If broken down by which party won the White House, a Republican victory produced a rising market in the calendar year following the election 10 times and a lower market 10 times. Similarly, a Democrat win produced a higher market in the calendar year following the election seven times and a lower market six times.

If statistics interest you, you may find this curious: Hirsch’s Almanac also shows that in the 15 elections between 1900 and 2000, the market rose 13 times when the incumbent party reclaimed the presidency. In the two years of decline, the market dropped only 0.5 percent and 2.3 percent, respectively. When the incumbent lost the presidential election, the market declined six out of nine times. However, only one of those declines was not considered relatively minor.

As you can tell by the historical data, presidential elections typically do not have a major affect the stock market. History has shown us that the relation between the outcome of the election and the stock market’s performance is truly a minor connection, at best.

After realizing the lack of a connection, you might be wondering if there is a factor that does correlate with the stock market’s performance. The simple answer to this question is yes — the economic cycle. If you look at the 11 post-election calendar years before 2000, you would see that there were six annual market gains and five annual market declines. Once again, nothing in these figures would indicate a clear connection between the stock market and the elections. However, if you compare the economy’s performance with the market’s performance, you just might find an interesting relationship that has developed over the years.

Over that same time period, in the five post-election years in which the economy entered a recession, the market declined in all five years. In the six post-election years in which there was no recession, the market rose five times and declined only once. Of course, no single economic indicator always correlates with the stock market’s performance. But in the year after the election, the stock market’s performance is usually influenced more by the economy, rather than by the election the prior November.

By keeping in mind a long-term investment strategy that fits your objectives and lifestyle, and selecting quality investments to help achieve your financial goals, you can rest easier and tune out some of the buzz around this year’s presidential election.

This article was provided by Josh Sprayberry of Wachovia Securities, LLC.  Member NYSE/SIPC, a registered broker-dealer and a separate nonbank affiliate of Wachovia Corporation.