2016 Election Series: Trends in Elections and the Markets
There are many academic researchers looking for correlations between stock market performance and the outcome of U.S. presidential election, the findings vary. Historically, whether a Republican or Democrat occupies the White House has no statistically significant impact on U.S. equity market.
The Presidential Election Cycle theory, developed by Yale Hirsch and based on historical observations that the stock market follows, on average, a four-year pattern that corresponds to the four-year election cycle.
On average, the S&P 500 saw 17.5% gains in the third year of a president’s first term and 11.5% returns during the second term. There are however exceptions, like in 2008.
Volatility tends to develop in the first year following an election, as the market digests change, and then gradually increases to its peak in the second year of the cycle. During this time, the market tends to generate minimal returns, especially during a president’s first term.
In the final year of an election cycle, average market returns were 6.1%, falling to negative territory during a president’s final term.
Since 1900, only 5 presidents have seen stocks rise more than 50% during their term: Calvin Coolidge, FDR, Dwight Eisenhower, Bill Clinton, and Barack Obama.