How does the stock market perform in the final two months of presidential election years?
What effect does the elected political party have on stock market performance in the years following the election?
Which sectors are the top performers during election years and post-election?
Below is a very encouraging chart as we close out 2016. With a President elect decided we have a very good
chance of moving higher through year end. Sure in 2008 we were in the middle of an economic disaster and
many people forget the protracted legal battle and “hanging chads” that kept the 2000 Presidential Race
on hold until December 12, 2000 when a 5-4 decision by the Supreme Court ultimately awarded Florida’s
electoral votes to George Bush providing him with the path to victory. But in most “normalized election years”
the markets move higher after a President is chosen.
S&P 500 and Dow Jones Industrial Average Underperform during Election Years
During presidential election years going back to 1928, the S&P 500 index has been in the positive 73% of the
time (16 out of 22 years). The average price gain of the S&P 500 during election years was 7%, which trailed
the 7.4% gain for the index during all years. When a Democrat was elected as President of the United States,
the S&P 500 was up for the year 58% of the time (seven out of 12 years) and saw an average price increase of
3.3%. When a Republican was elected as President of the United States, the index was up for the year 90% of
the time (nine out of 10 years) and posted an average price increase of 11.4%.
When performing this same analysis for the Dow Jones Industrial Average, we see a similar story. That is, the
index tends to underperform during presidential election years when a Democrat is elected (compared to
when a Republican is elected) and also underperforms during election years in general (compared to all years).
This is shown in the two charts below.
What Does History Indicate about the Final Two Months of Election Years?
As of close on November 1, 2016 the S&P 500 is up 3.3% year-to-date. Looking at the final two months of
presidential election years going back to 1928, the S&P 500 index gained in value 64% of the time (14 out of
22 years). The average price increase was 1.9%, which trailed the 2.1% average increase in the final two months
of all years.
When a Democrat was elected as president, the S&P 500 posted an average price gain of 0.6% (during the
final two months of election years), which was well-below the 3.6% average gain when a Republican was
elected. When performing this same analysis for the Dow Jones Industrial Average, the average price increase
in the final two months of election years actually exceeded the average gain in the final two months of all years
by 0.3 percentage points. The effect that the elected political party had on the Dow’s price movement was
consistent with that of the S&P 500 index.
Post-Election Years: Third Year after the Election is a Charm
Looking at the first year after the presidential election (going back to 1928), the S&P 500 index has increased
in value 55% of the time (12 out of 22 years), with the average price gain amounting to 5.1%. When a Democrat
was elected president, the S&P 500 was in the positive during the first post-election year 75% of the time
(nine out of 12 years), with the average price increase equaling 11.7%.
When a Republican was elected president, the index was in the positive only 30% of the time (three out of 10
years), with the average price change amounting to -2.8%. Keep in mind that this represents a stark contrast to
the price change for the S&P 500 during election years, when a Democrat was elected versus a Republican. In
election years, when a Democrat was elected as President of the United States, the S&P 500 underperformed
(compared to when a Republican was elected) on average by 8.1 percentage points.
As shown in the chart below, the third post-election year experienced the largest price gain for the S&P 500
on average. During the third year after the presidential election, the S&P 500 increased 12.8% on average,
which exceeded the 7.4% annual gain for all years (going back to 1928). No other post-election year logged an
average percentage increase that beat the 7.4% watermark.
S&P 500 Favors Democrat to New Democrat President Transition over Democrat to Republican
From a political continuity perspective, a Hillary Clinton win would be better for the market in the first year
after the election, based on history. On average, the S&P 500 index increased in value by 9.8% in the first postelection
year when the political party of the president transitioned from a Democrat to a new Democrat. Keep
in mind, though, that this has only occurred twice since 1928.
Contrastingly, the S&P 500 decreased in value by 10.2% on average in the first post-election year when the
political party of the president shifted from a Democrat to a Republican. This has occurred four times since
1928. It is interesting to note that in the second and third years after the election, the Democrat to new
Democrat transition underperformed the Democrat to Republican shift.
Consumer Discretionary has been Best Performing Sector in Post-Election Year
Looking at post-election years going back to 1992 (when all S&P 500 sector data is available), the S&P 500
index still performed best in the third year following the presidential election. At the sector level, the Financials
group saw the largest price gain during election years, posting an 8.8% average jump. The Telecom, Information
Technology, and Materials sectors were the only groups to log an average price decline during election years.
In the first post-election year, all S&P 500 sectors saw an average price increase, with the Consumer
Discretionary group leading the way (+19.9%). The Information Technology sector led all groups in terms of
price performance for the second and third years after Presidential elections. Once again, all S&P 500 sectors
posted a price gain on average during these years.
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