The Impact of Presidential Elections on the Stock Market

XPYRIA Insight

What will the world look like when we wake up on November 9th, 2016? If history is any predictor, it would appear that the election of either Donald Trump or Hillary Clinton will have very little lasting impact on the financial markets. In the short-run, uncertainty is to be expected. In the long-run, this uncertainty actually helps astute investors because it affords them an opportunity to take advantage of short-term market dislocations to buy fundamentally sound businesses at a discount.

Theories about the performance of the stock market surrounding an election date back to the 20th century when economist Yale Hirsch developed the Presidential Election Theory. This theory states that U.S. stock market returns are strong in the year prior to and the year of an election and weak the year following an election. Pundits have pointed to this to create fear about the prospects for domestic stock market returns in 2017. The problem is that this theory has repeatedly fallen flat. If the theory were true, then 2007 and 2008 should have been strong and 2009 should have been weak. The opposite was true. Numerous other occasions, including 1960, 1984, 1988, and 1992, show us that using presidential elections as a guidepost for future stock market performance may be foolish. It is true that in the months leading up to and immediately following a presidential election there is increased volatility due to uncertainty about the political future of the country. In the long-run, stocks are still one of the best places to invest your money for future growth. In fact, since 1966 stock returns have averaged over 9% per year, more than doubling the returns of fixed income. Over this timeframe we have had 12 major military operations, 7 major global market corrections, and numerous terrorist attacks. We have also had 12 presidential elections and 7 different presidents and yet the stock market has shown resiliency.

So what does this all mean? From our perspective, it is a fool’s game to try to predict the day-to-day and month-to-month returns of the stock market. We believe that a sound investment strategy includes plans for both short-term and long-term objectives. Staying diversified and taking advantage of volatility to rebalance to stocks when there is uncertainty will give you a much better chance of reaching these objectives than trying to predict the presidential election and time the market.