History suggests that the lead up to next year’s election and the year thereafter could give rise to a stock market rally
The countdown is on until next year’s US presidential election. Never mind the fact that the Democrats still need to run a primary election, or the impeachment proceedings hanging over President Trump - the market has an eye on November 3, 2020.
As we begin to look ahead to what is sure to be a hotly-contested election, it’s also worth reflecting on how previous elections have shaped the US stock market. The good news is that markets have posted some of their strongest rallies before and after US presidential elections.
Since 1900, the Dow Jones has delivered average returns of 7.6% during years in which the presidential election takes place. Among those 30 instances, the market was higher 70% of the time, with gains typically skewed to the second half of the year.
This record is weighed down by anomalies at the start of the 20th century. In fact, since 1928, there have been just four instances (out of 23) where the S&P 500 fell during an election year. The most recent was 2008 amid the GFC. Before that, it was the 2000 tech bubble.
Most (13) elections since 1928 have involved a sitting president seeking re-election. Only four have lost their bid for re-election (1932, 1976, 1980, 1992), each time immediately after a recession. In re-election years, the S&P 500 has only fallen twice – once after the 1932 recession, and then in 1940, during the Second World War.
This data suggests recessions are a key point in presidential elections. President Trump would be well aware that keeping the US out of recession is key to his own presidential re-election. The Federal Reserve are also being pro-active to stave off the risk of an economic slowdown. Combined, these points could add great support to markets next year.
While some analysts argue that the first year after an election is considered the ‘weakest’ year for markets, a recent trend dispels this as somewhat of a myth.
The first year in each of President Obama’s terms in office were particularly strong. In fact, the Dow Jones bolted 27% higher during the first year of his second term.
Prior to that, markets climbed 25.2% during President George H.W. Bush’s first year. Similarly, the beginning of both of President Clinton’s terms in office saw markets perform strongly, up 19.9% and 35.9% respectively.
Even President Trump was the beneficiary of a strong market during his first year in the Oval Office, where the S&P 500 was up more than 20%.
So while long-term data still points to the post-election year as somewhat of a market ‘hangover’, this is skewed by misleading historical data from the 1800s and early 1900s. Instead, since 1926 the average return in the S&P 500 in the year after an election is 9.9%.
In summarising, it should be noted that past performance is no indicator of future performance. However, US markets have a strong pre and post-election record that might just play out again heading into next year’s presidential election.
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