According to data collected
over almost 110 years by Ned Davis Research, Inc.,1 the stock market has
produced mixed results in the first two years of a
presidential cycle — the post-election and mid-term
years. Although no one knows why for sure, one
possibility may be that the party in power tends to
make difficult economic decisions in these early years,
and that can be unsettling to the stock market.
However, in the third year of the cycle — the pre-election
year — the likelihood of a positive return rises
to 80% and to more than 70% in an election year.
That's generally good news for today's investors. Even
though the 2011 pre-election year did not seem to be
following this pattern, as stocks have faced a long list of domestic and global challenges, a lot can happen in a short period of time.
Now an election year is upon us.
Since 1900, the stock market has recorded an average gain of 7.5% in an election
year — second only to the pre-election year in the presidential cycle. With U.S.
economic growth gaining some momentum and new job growth picking up,
prospects for a positive election year for the stock market are improving.
Historical data also reveals some interesting tilts that break down party lines.
As an election year looms, keep these historical trends in mind.
- For 2011 — a pre-election year — history favors a positive stock market. In the 12 pre-election
years with Democratic presidents, there has been only one down year — and the average gain
for the U.S. stock market over those periods has been 18.3%.
- In 2012, the stock market's return might be higher with a Republican victory. The average return
in election years when Republicans won the White House has been 12.4% versus 2.9% in
election years when Democrats won.
- But then there's the incumbent factor: Stocks have historically done better in a presidential
election year when the incumbent party won the election. When an incumbent has retained the
White House, the average return was 17.5% versus a loss of 1.8% when the incumbent was
defeated. One theory is that the uncertainty created by change affects investors unfavorably.
Past performance is no guarantee of future results.
If volatility has you sitting on the sidelines, the stock market's prospects may look
better against the historical backdrop of the presidential election cycle. After all,
much of the pre-election year volatility has been the result of extraordinary events,
such as the disruption in the global supply chain that followed the devastating
natural and nuclear disasters in Japan, the continuing debt crisis in Greece and the
ongoing debt-ceiling and budget deficit debates that have weighed down the U.S.
Congress. Don't let these short-term factors disrupt your long-term investment
plan. Stay focused on your goals. Work with your financial professional to put the
market cycles to work for you. Keep in mind that the long-term direction of the
stock market has been positive with Democratic and Republican presidencies and
Congresses. That's a result everyone can cheer about.
1Source: Ned Davis Research, Inc. Copyright 2010 Ned Davis Research, Inc. Further distribution
prohibited without prior permission. All rights reserved.
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