Although it is nearly a year away, investors are already considering the potential equity market impact of the 2020 United States presidential election.
This report is the first in a series exploring prior elections and their relationship to the market.
The start of the 2020 campaign coincides with what traditionally begins the equity market’s best six months (November through April) of most years, but the market this November potentially added an extra boost to stock prices.
Since 1945, there have been 28 years when the S&P 500 has posted gains in January and February, including this year. In the previous occurrences, the S&P 500 was up every year for an average 24% total return, as the final two months of these years posted an average gain of approaching 5%. However, the market in 2019 is one of only 11 years when the S&P 500 recorded a new all-time high in November. In the previous times when a new high was set in November, the average two-month return improved to nearly 6.5%.
Election Cycle Pattern
Stock market performance thus far in 2019 has coincided with the
presidential election cycle pattern.
In the 23 four-year presidential election cycles beginning in 1928 through this year, the market failed to produce a gain only five times in the third year of the cycle (1931,1939, 1947, 2011, and 2015), which on average outperformed the other three years by a wide margin. Removing the Depression-induced drop in 1931, the average for the third year of the cycle goes up to 16.01% from 13.27%. The S&P result so far in 2019 is the seventh best of the third-year results.
Data as of November 15, 2019. Sources: Thomson Financial; Janney Investment Strategy Group.
Investors’ sights soon will turn to the fourth year of the election cycle, which on average has been the second best for stocks. A closer look at the data also reveals a potentially more optimistic outlook. Considering only the fourth year of the cycle and taking out the two best years (1928 and 1936), the average fourth-year return falls to 4.65%. Excluding all Depression-period years, the average return is 5.63%. Since a recession in our view is not in sight, it is more relevant to consider what happened when removing the two most recent recession periods (2000 and 2008) from this calculation, which pushes the average fourth-year return to 10.10%.
What the Stock Market Foretells
Investors often believe the result of a presidential election suggests what the stock market will do in the year that follows. More often, however, the stock market
gives an indication of the result of an election. The last two presidential elections provide prime examples.
According to data assembled by CFRA-Standard & Poor’s, the performance of the stock market before the election often predicts whether the political party in the White House retains its residency.
Since 1944, if the S&P 500 rose in price from July 31 through October 31 of a presidential election year, the incumbent party was re-elected 80% of the time. This was the case in 2012 when President Barack Obama was re-elected.
If the market is down during the period, the incumbent party lost the White House 86% of the time. The only exception occurred in 1956, when the market incorrectly suggested that Adlai Stevenson would defeat incumbent Dwight Eisenhower.
The S&P 500 fell 2.2% from July 31 through October 31, 2016. This suggested a Republican victory, which became reality when President Donald Trump was elected.
As we move close to the 2020 election, we will update and add relevant information to this series of reports.
Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment.
This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.