Four Ways to Trade a Presidential Election

With the U.S. presidential election race starting to really heat up, you might be wondering how to manage your portfolio during this run for power.

Let's see what we can learn from the S&P 500, which I use as a stock market proxy.

In "How to Build Your Own Trading Model in 8 Steps" and "Trading Model Construction: Tracking the S&P 500", you can see how by using S&P data, you can develop your own macro trading models.

That said, I have found that the S&P 500 has an interesting trading pattern surrounding the presidential election cycle, which is comprised of four distinct years:

1. Pre-Presidential Election Year (e.g., 2007)

2. Presidential Election Year

3. Post-Presidential Election Year

4. Midterm Election Year (when the House of Representatives is elected along with a third of the Senate)

TheStreet.com TV: McCain vs. Obama: Who's Better for the Economy (Video)

Political writer John Fout breaks down where the presidential nominees stand on capital gains, taxes and Wall Street. To watch the video, click the player below.

How to Play a President Election Cycle

Strategy 1: Stick to the Pre-Presidential Election Years

I use S&P data going back to 1950, which as it so happens was a midterm election year. Thus, there were 58 full trading years and 15 presidential elections, which have taken place since that year. The simple average return for the S&P (price only) is 9.37% for the 58 years in my database.

The average return for each of the presidential election cycle years is:

1. Pre-Presidential Election Year: +19.32%
2. Presidential Election Year: +9.29%
3. Post-Presidential Election Year: +3.06%
4. Midterm Election Year (no presidential election but the House of Representatives is elected along with a third of the Senate): +6.03%

This is some very interesting data. Presidential election years are just about on par with the S&P's 58-year average return, which indicates that there is no election year bias. However, pre-presidential election years are very strong, returning nearly twice the average annual results. The post-presidential election year is weak and the mid-tem election year is below average.