Stock market is in an election year: Will your vote impact your money? – The Hill

In the run-up to the midterm elections this year, many pundits are advancing theories on what the ballot box results will mean for the stock market. Investors and researchers alike are always attempting to identify systematic relationships in stock market returns. From the “Santa Claus rally” to “sell in May and go away,” investors are constantly searching for repeatable patterns in stock market returns. The entire field of technical analysis is based upon the premise that patterns occur in market prices and that one can profit from identifying and trading on those recurring relationships.

Whether the Republican Party or Democratic Party is better for the stock market has been, and will continue to be, hotly debated on news and market talk shows, in cafes and coffee shops, and at company water coolers. On the presidential front, the empirical evidence strongly favors Democratic presidents. From 1929 through 2017, the market returned a robust 14.7 percent during the calendar years of Democratic presidents, compared to only 6.8 percent during Republican presidential administrations.


Even if you ignore the Hoover administration, and Republicans would certainly like to do so, the average return during a Republican administration at 10.1 percent is still markedly lower than the return during Democratic administrations. It makes one wonder why the Republican Party is often referred to as the party of business, although both parties tend to claim that during their time in office, they make all of the tough choices to set the next leader up for success.

But simply looking at one variable, in this case the party of the president, can be problematic and lead to inaccurate conclusions. An explanation for the outperformance of Democratic presidents over Republican presidents can be found by looking at Federal Reserve policy. Working with Scott Beyer of the University of Wisconsin and Gerry Jensen of Creighton University, I published research in the Journal of Portfolio Management that showed that after controlling for Federal Reserve monetary policy, the party of the president was not a significant factor explaining equity returns.

Remember, simply because two sets of data have moved together in the past (correlation) doesn’t mean that there is causation between the two or that the pattern will continue unabated into the future. For instance, the annual number of people who drowned by falling into a swimming pool is highly correlated with the number of films Nicolas Cage appeared in during that year. I doubt that anyone would suggest that either folks were drowning because they had attended a Nicolas Cage movie (now, many people may have regretted they went to that movie, but not to the extent they wanted to end it all), or that Cage appeared in more or fewer films because of the number of pool drownings. One must remember that there is a dramatic difference between correlation and causality.

The existence of a “presidential election cycle,” during which returns are lowest in the first half of a president’s term and markedly higher in the second half, has been advanced for many years. The basic premise is that our elected leaders want to get the bad news out early in their terms, so they (or their party) stand a better chance of getting reelected. Some even contend that fiscal policy actions are more heavily back-end loaded in a president’s term. Others suggest that returns are higher in the second half of a presidential term because it becomes more apparent that a popular president will be reelected or an unpopular president will be replaced.

Indeed, on average, markedly higher returns have been realized in the second half of a president’s term. From 1929 through 2017, the average stock market returns in years one, two and four of Presidents’ administrations have been remarkably similar. The S&P 500 (and S&P 100 prior to 1957) has returned 9.9 percent, 9.0 percent, and 9.8 percent, in years one, two and four, respectively. The outlier has actually been year three with a robust return of 17.0 percent. The third year of a presidential term, it seems, has been the charm.

Barack ObamaBarack Hussein ObamaOvernight Energy: Dems ask Pruitt to justify first-class travel | Obama EPA chief says reg rollback won’t stand | Ex-adviser expects Trump to eventually rejoin Paris accord Overnight Regulation: Trump to take steps to ban bump stocks | Trump eases rules on insurance sold outside of ObamaCare | FCC to officially rescind net neutrality Thursday | Obama EPA chief: Reg rollback won’t stand Ex-US ambassador: Mueller is the one who is tough on Russia MORE’s third years were an exception. He was certainly a groundbreaking president on many fronts, and his relationship with the stock market is consistent with that profile. You have to go all the way back to Hoover and the second Roosevelt administration to find lower year three returns than each of Obama’s year three returns. In 2011 and 2015, the S&P 500 returned a paltry 2.1 percent and 1.4 percent, respectively. Despite that, the market returned an average of 19.8 percent annually during Obama’s tenure in the White House. You would have been sorely disappointed betting that “the third year is the charm” under Obama.

One of the most often cited — and incorrect — mantras of the stock market is that political gridlock is good for the markets. That is, that when the party controlling Congress differs from the Party of the President, the equity markets flourish. That rationale for this “gridlock is good” theory stems from the notion that gridlock reduces economic uncertainty due to the diminished chance for significant legislative change.

Working with Professors Beyer and Jensen, I found the exact opposite to be true. That is, equity returns tend to be higher and less volatile during periods of political harmony. Despite the evidence, I am convinced that in advance of the upcoming elections you will hear the claim that gridlock is good for the markets. We know that political harmony (at least in the sense of the same party controlling Congress and the presidency) has certainly been good for the markets since the election of Donald TrumpDonald John TrumpAccuser says Trump should be afraid of the truth Woman behind pro-Trump Facebook page denies being influenced by Russians Shulkin says he has White House approval to root out ‘subversion’ at VA MORE.

What all this means is that you should look at the issues and vote your conscience in the upcoming elections and not attempt to determine what it will mean for the value of your investments. Remember that in 2016, the conventional wisdom was that Hillary ClintonHillary Diane Rodham ClintonWoman behind pro-Trump Facebook page denies being influenced by Russians Trump: CNN, MSNBC ‘got scammed’ into covering Russian-organized rally Pennsylvania Democrats set to win big with new district map MORE was the preferred choice of market participants because she represented less uncertainty. While we will never know how the markets would have performed under a second President Clinton, despite all the uncertainty, the nearly 30 percent rise since Trump’s election would be tough to beat.

Robert R. Johnson, Ph.D., CFA, is president and chief executive officer of the American College of Financial Services. He is co-author of “Strategic Value Investing,” “Invest with the Fed” and “Investment Banking for Dummies.”

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