It’s an election year, and investors across the country are trying to predict how the markets will respond after the polling locations close and a presidential victor is announced. Will the longest economic expansion in U.S. history continue? Will stock prices continue to rise or will they start to decline? While there is no crystal ball that can provide guaranteed answers to these questions, we do have the benefit of history and past performance to help guide us to where the markets may be heading in the future.
Historically speaking, the third year of a sitting president’s term has generally produced the best stock market returns, with the first year showing the weakest market performance. This makes sense when considering that the markets do not like uncertainty, which occurs during a president’s first year, when his policies are untested and may be considered controversial. By the third year, those policies may start to show some positive results, and, a sitting president is likely to try to create or maintain a good economy in hopes of re-election the following year. However, market volatility has tended to pick up leading into the last quarter of that fourth year, as election day approaches and uncertainty over which candidate may win increases.
To assess past market performance during election years, it’s interesting to consider whether an election involved an incumbent president running for reelection. Historically, the better the economy and the stronger the stock market, the more likely an incumbent president was reelected. According to a report from Goldman Sachs, the average annual return during election years in which a sitting president ran for reelections was 11.9 percent since 1873. However, in the first year of a president’s second term, the average annual return was -2.4 percent, with annualized 2.3 percent returns for the entire second term, as compared to an average 8.3 percent return for the first term.
No analysis of elections and their impact on stock market returns would be complete without considering the state of the economy, measured by such factors as consumer confidence and unemployment, leading into the election year. After all, all voters will feel the effects of a slowing economy or recession during an election year, and those strains may continue into the first year of a new presidency or the second term of a sitting president.
While history can be a good source for predicting future market performance, its important to remember that elections will create some level of uncertainty that may spill over into the equity markets. Investors should work with their financial advisors to ensure their portfolios are well-positioned to help protect wealth and defend against market volatility.
To learn more about elections and their impact on investor returns, listen to Provenance Wealth Advisors Relatable Finance podcast at https://www.provwealth.com.
About the Author: Shane Phillips, CFA, CAIA, CFP ®, is a portfolio manager with Provenance Wealth Advisors (PWA), an Independent Registered Investment advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with Raymond James Financial Services. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or via email at firstname.lastname@example.org.
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Shane Phillips, CFA, CAIA, CFP ®, is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
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