The U.S. presidential election cycle has a well-known effect on American stock markets, but what is less known is that the election cycle appears to have an even bigger impact on Asian markets.
In general, the economic cycle and market valuations do play a bigger role in how U.S. markets perform than presidential politics. But it does make sense that the presidential election cycle would also affect market performance.
Elections bring a predictable cycle of policy changes and economic stimulus, along with the hope for real positive change followed by the usual disgust and despair over the state of the political process. And these emotions can have an effect on stock markets.
The presidential election cycle divides into four stages, based on a president's four-year term. Here, we divided this four-year term into the post-election year (the first year of the presidency, starting in January), the midterm year (year 2 of the presidency), the pre-election year (year 3 or 2015 more recently) and the election year itself (year 4 or 2016).
As shown below, since 1928 the S&P 500 has gained an average of 12.8% during the pre-election year. But last year, the most recent pre-election year, the S&P 500 broke with tradition and was down just under 1%.
The other years in the presidential cycle have seen the market gain between 4.8% and 5.5%, on average. The pre-election year's huge market out-performance over 21 election cycles suggests that this is more than just coincidence.
It appears -- though it is based on a small sample size -- that the presidential cycle has an even greater impact on Asian markets.
As the following chart shows, the MSCI Asia ex Japan Index has gained 24% and 20% during American post-election and pre-election years since 1988, when data became available. And during midterm and election years it has been flat.
The index has averaged gains of 11% a year overall.
For Malaysia and Singapore's markets, the effect is less pronounced. But the post-election years have been strong for both countries' markets, with Malaysia's KLCI up 16% and Singapore's STI up 15% on average.
For Malaysia, the pre-election year saw the best performance on average. And for both indexes, the election year this year saw the weakest performance.
One reason that Asia's stock markets seem to be so influenced by the U.S. presidential cycle could have to do with the small sample size. The indexes looked at, and Asia's stock markets in general, are relatively new and haven't seen many four-year presidential cycles.
A limited number of data points means that historically unusual returns such as 2008's stock market collapse have a bigger impact on average returns.
But that isn't the whole story. American politics can sway global investor sentiment, and in smaller markets with less liquidity, like many Asian markets, a smaller absolute amount of funds invested or withdrawn can have a bigger effect than in larger markets.
Whatever the reason, because this is an election year we shouldn't be surprised to see underwhelming market performance as election years have historically been a bad year for every market. But post-election years are normally great for Asian markets.
So, if the pattern holds, prepare for a great year for Asian markets next year.
This article is commentary by an independent contributor.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.