This election year has already seen its share of high drama. As both political parties seem to be shaking out to a core number of candidates, one must remember it is still early in the election year. Each new caucus or primary seems to change the headlines of who is leading each party. Federal policies surrounding issues such as the economy, the federal deficit, health care, immigration and foreign policy are highly dependent on the outcome of the presidential election as well as congressional seats, making it particularly difficult for the pundits to predict what the full platforms will be for this year.
Potential power split could mean more Congressional deadlock
The Republican party’s current majority in the House of Representatives, where they hold 246 out of the 435 seats, is likely to be maintained regardless of who sits in the White House. The probable outcome in the Senate is less obvious, where the Republicans hold a 54 to 44 seat majority. This could shift in the upcoming election, and political experts believe that whichever party wins the presidency will also control the Senate. Therefore, if a Republican takes the White House, this is likely to mean a Republican-controlled Congress, which may make it easier to enact policy change. Conversely, if a Democrat wins, the country could end up with the same political stalemate that exists today.
Markets are historically weakest in year four
Uncertainty of any kind, be it political or economic, is typically not helpful for upward market momentum. With the exception of 2011, the third year of presidential terms in recent election cycles has resulted in the strongest market performance. This could be the result of spending to stimulate the economy and paint as positive a picture as possible.
S&P 500 Return in Third Year of Recent Presidencies
|President||Pre-Election Year||S&P Return|
Source: PNC, S&P
Presidential election years in the post-World War II era have proven to be the weakest for domestic equity markets. The scenario worsens when we consider open election years, where there is no incumbent. According to research from the Ned Davis Research Group, S&P 500 returns averaged 9.0% in incumbent years versus -6.6% in open years.
On top of the domestic theatrics unfolding, uncertainty driven the oil situation and the global economy are also having a strong impact on the markets. This makes it difficult to predict how much election year uncertainty will influence market performance. The S&P 500 is down approximately 10% for the year as of the third week of February 2016. Only six election years since 1896 have experienced declines above 5%, although the last two occurred in 2000 and 2008, the most recent cycles. We anticipate, given the uncertain domestic and global environment, that volatility will continue through 2016. We maintain our recommended allocations and our emphasis on quality, while carefully monitoring the markets, global economic data, and unforeseen events.
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The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.
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