Election days are here again

Impact of the election cycle on the market

So far this election cycle appears to be unlike any other in recent U.S. history. On one side we have a popular real estate mogul with no formal government experience and on the other, the United States first female presidential candidate from a major political party. Perhaps similar to other elections, there is a great deal of contentiousness, even beyond political views, between the Democratic and Republican candidates.

Analysts often look at the course of a presidential term to see if there are any patterns in the markets for different years in the cycle. In previous election and re-election cycles, certain patterns did appear in market returns. However, many past election trends do not appear to hold true anymore. For example, from the 1960s on, the strongest market typically occurred in the third year of a president’s first term in office, with the exception of 2011. To date, in the post-Great Recession environment, this trend has not been borne out, as we saw in the last election, when the 2011 return was the lowest of the four-year period.

Election years are usually good for the markets

Market returns in election years historically tend to be positive, although those election years when the incumbent is not up for re-election historically have fared less well. The median return of the S&P 500 in election years since 1928 is 9%. Out of the 21 elections that have taken place during that period, returns have been positive over 70% of the time. In addition, there have been market rallies of at least 10% during an election year, with the median rally coming in at 17.2%. For election years in which a correction occurred, corrections tended to be in the -10.3% range. We can safely say that this election year has already covered both in terms of a correction and a rally, thanks to the volatility of the first quarter of the year, as well as the short-lived impact of Brexit. Although we are coming into the home stretch of the election cycle, there is still a high degree of uncertainty surrounding the outcome.

 A balance of party power

The markets seem to prefer a balance of power rather than one political party controlling both the executive and legislative branches of government. Historically, a mixed Congress, with party power split between the Senate and the House of Representatives, appears most conducive to positive market returns.


What’s ahead as the election gets closer?

We now know previous election year trends no longer seem to hold true, so examining past election cycles to shed light on what the markets may do during this one is unlikely to bear fruit. Certainly, with emotions and opinions running high on both ends of the political spectrum, we anticipate that volatility could increase as we get closer to Election Day.

Gains Under Various Configurations of Party
of President and Majority Party in Congress

March 4, 1901 to August 7, 2012

Market Correction Stocks
(DJIA)
Industrial Production Inflation
(CPI)
Real Stock Returns Long-Term Gov't Bonds* Fed Dollar**
Democratic President 7.73% 5.26% 4.44% 3.14% 3.84% 0.11%
Republican President 2.95 1.80 1.80 1.13 7.75 -1.42
Democrat Congress 6.01 4.48 4.36 1.59 5.54 -1.11
Republican Congress 3.57 1.45 0.65 2.89 6.39 -0.23
Dem. Pres. Dem Cong. 7.26 6.29 4.60 2.54 2.89 -2.24
Dem. Pres. Rep. Cong. 9.63 1.11 3.79 5.63 8.14 4.00
Rep. Pres. Rep. Cong. 1.62 1.56 -0.37 2.00 5.48 -4.24
Rep. Pres. Dem. Cong. 4.32 2.04 4.01 0.30 8.99 -0.56
All Periods Buy/Hold 5.13 3.38 3.01 2.06 5.77 -0.91


*Data since 1925
**Data since 1971
Note: Majority party = Party with average control in House and in Senate Greater than 50%
Source: Ned Davis Research, PNC

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