Presidential Election and the Markets

Usually the market performs well in an election year. In fact, there have been only three election years that suffered losses since WWII. The market usually posts better-than-average gains (2008's plunge brought down the average, but the median return is above average).

The four-year presidential cycle of stock market performance evident in Chart 1 has been remarkably consistent over the years, with strong performances in years three and four of a presidential term, with weaker results in years one and two. Interestingly, 16 of the 20 down years since 1940 came in the first or second year of a presidential term.

A key reason for this historical pattern of stock market performance during a presidential term is the greater amount of economic stimulus, in the form of both monetary and fiscal policy, applied during year two and three, which then begins to fade in year four. Since this stimulus affects the economy with a lag of around a year, stock market performance tends to follow this pattern of stimulus, leaving years one and two paying the price for the better years three and four leading up to the election.

Past performance is no guarantee of future results. The S&P 500 is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results.

A relatively volatile and range-bound stock market leading up to a fourth quarter breakout--one direction or another--has been a common occurrence in election years, taking place in 1992, 1996, 2000, 2004, and 2008.

Looking out to 2013, there has been no significant performance difference in the year after the presidential election based purely on which political party won the White House. Instead, the stock market has been more likely to respond to whether the incumbent political party won or lost. This is intuitive, since another term for the same party will likely result in a more consistent political, legislative, and regulatory environment than if the balance of power shifts to that of a new administration, raising the level of uncertainty.