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Presidential Election and the Markets

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- This week marks six months until election day. During the next six months, the elections will likely become an increasingly potent driver of the markets. While we believe the impact for changes to the makeup of Congress may be more meaningful than the presidential election, we will tackle that in a later commentary. In this week's commentary, we focus on the presidential election's relationship to the performance of the markets and economy. Specifically, we address:
  • The market's impact on the election,
  • The election's impact on the markets,
  • The economy's impact on the election, and
  • The election's impact on the economy.
  • Market Impact on Election

    Perhaps surprisingly, the stock market does not predict the outcome of the election. A strong stock market does not appear to favor an incumbent nor has a weak stock market acted as material negative. For example:
  • Franklin D. Roosevelt was re-elected in a landslide victory in 1940, despite losses in the S&P 500 in the third and fourth years of his term.
  • Harry Truman (1948) and Richard Nixon (1972) also were re-elected in the face of lackluster stock market results.
  • Adlai Stevenson lost in 1952, even though the stock market rose over 50% in the two years before the election under his party's leadership.
  • Incumbent George H. W. Bush lost in 1992, even with a 57% gain in the stock market during his tenure.
  • Al Gore was unable to secure the presidency in 2000, despite the powerful eight-year stock market gain while under his party's tenure in the White House.
  • History shows that voters are unwilling to attribute moves in the market directly to presidents, either positive or negative.

    Election Impact on Market

    Historically, the election does appear to have a significant impact on the stock market. This is explained, in part, by the material impact on corporate profits of regulatory policy guided by the White House and legislation passed by Congress. Industries that are heavily regulated are the most affected; these include: Health Care, Utilities, Telecommunications, Media, Energy, Materials, and Financials.

    Usually the market performs well in an election year. In fact, there have been only three election years that suffered losses since WWII. The market usually posts better-than-average gains (2008's plunge brought down the average, but the median return is above average).

    The four-year presidential cycle of stock market performance evident in Chart 1 has been remarkably consistent over the years, with strong performances in years three and four of a presidential term, with weaker results in years one and two. Interestingly, 16 of the 20 down years since 1940 came in the first or second year of a presidential term.

    A key reason for this historical pattern of stock market performance during a presidential term is the greater amount of economic stimulus, in the form of both monetary and fiscal policy, applied during year two and three, which then begins to fade in year four. Since this stimulus affects the economy with a lag of around a year, stock market performance tends to follow this pattern of stimulus, leaving years one and two paying the price for the better years three and four leading up to the election.

    Past performance is no guarantee of future results. The S&P 500 is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results.

    A relatively volatile and range-bound stock market leading up to a fourth quarter breakout--one direction or another--has been a common occurrence in election years, taking place in 1992, 1996, 2000, 2004, and 2008.
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