Can Politics Predict the Markets?

Can political cycles predict investment returns? There is some evidence of a statistical link. Take a look at Your Survival Guy’s chart of the S&P 500’s performance during presidential election years back to 1952. You can see on the chart that in only three election cycle years (Election Day to Election Day), 1960, 2000, and 2008, the S&P 500 lost value. The election year of 1980 saw the biggest increase in value for the index with a rise of 30.9% in the year Ronald Reagan was elected. Midterm elections, as you’ll read below, aren’t quite as reliable as presidential election years.

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Here’s what Dick Young wrote back in 2018 on the subject of elections and investing:

I have written in the past that politics can have a great effect on market performance. Today America is enduring one of the most contentious political climates in memory, and at the same time the stock market has become volatile.

The best year in the four-year presidential election cycle is the year before the election. In this cycle that’s 2019. Since 1875, the average performance of the S&P 500 in the calendar year before a presidential election has been 14.3%. The presidential election year itself comes in next with an average of 10.9%, and midterm election years and the year after the presidential election produced averages of 9% and 8.9% respectively.

So does that mean a roaring bull market is guaranteed in 2019? Of course not, there are no promises, no tricks, and no shortcuts in investing.

I wrote this back in 2006 (charts have been updated to reflect the subsequent years):

Politics & Stock Prices from 1959 On

The stock market likes good times. Until just recently in 2005, most investors (not you, I trust) have not had much about which to cheer. Much of the trauma this year has related to the foul media coverage President Bush has received regarding Hurricane Katrina and the Iraq war. Just how much does the political landscape affect stock prices? A whole lot. In fact, few variables rate higher on my list of stock market influences. To make my point, I have put together four historical displays starting with the year I got started with the stock market—1959. The displays depict stock market gains and losses in each of the four years of the presidential cycle.

Display #1—Election-Year Power

Anyone who tells you to pay no attention to politics as it relates to the stock market is smoking something funny. Politicians of all stripes will say just about anything to get elected, and the vote-getting bribery of politics provides a good-time feeling in almost every election year. Since 1959, a presidential election year has brought with it higher stock prices in 10 of 12 years.

Display #2—The Year After a Presidential Election

The rubber hits the road as the incoming president attempts to back up all those over-the-top campaign promises. The results are often short of the mark, and the stock market has an in-and-out time of it. The stock market results in 2005—an after-election year—have been pretty predictable.

Display #3—Two Years After a Presidential Election

This is also an in-and-out year, as electioneering is not front and center. Furthermore, tough and often unwelcome presidential decisions must be made.

Display #4—The Year Before a Presidential Election

Since the banner year of 1959, there has not been a single stock market downer in the year leading up to a presidential election. Furthermore, stocks make big gains more so than in any other year in the presidential election cycle. Since 1959, you get a 22-and-2 record of ups and downs when you pair the year before a presidential election with the election year. By contrast, pairing the two years following a presidential election gives you a not-so-hot 11-and-11 record.

Looking Ahead and Cringing

In terms of the presidential election cycle, next year has the lowest odds of success of any of the four years in the cycle. Worse yet, the year coming up, 2006 (two years following the presidential election), has the fewest number of big years.

Action Line: Elections come and go, but you must survive. Click here to subscribe to my free monthly Survive & Thrive letter, and I’ll help you achieve the goals you’ve set for you and your family’s personal and financial preparedness.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.