Election Years and Stock Markets

Every four years, we get a lot of the same questions about elections and the stock market. In one form or another, people are generally asking how the market performs during election years.

The graph at the right shows average market performance for each year of a presidential term. As such, the market will grow at 6% this year, right?

To see how well the average returns stack up to reality, let’s review the S&P 500’s performance from the last two Presidential cycles.

Election Years2008:   -37.00%     Election year
2009:   26.46%      Post-election year
2010:   15.06%      Mid-term year
2011:   2.11%        Pre-election year
2012:   16.00%      Election year
2013:   32.39%      Post-election year
2014:   13.69%      Mid-term year
2015:   1.40%        Pre-election year
2016:   ___???      Election year

In comparing the graph and the data, the historical averages don’t tell us a lot about what we can expect from the market in a given year. While the averages tell us pre-election years are supposed to be great for investors, 2015 was the first pre-election year since 1939 that the Dow ended negative.

Averages are facts based on historical data, but are not very helpful in telling us what will happen in the short-run. In order to ensure you earn the averages over time, however, you have to live through the lulls to ensure you are in the game for the booms.

After a largely sideways year in 2015, the new year has started off horribly for global stock markets. Several news sources have pointed out that the 5% plunge in the first week of 2016 was the worst start to any year since 1928. Since then, the march downward has continued into correction territory (a decline of 10%).

Drops like this certainly do not feel good, but the way this year has started is also irrelevant in terms of guessing where the year will end. After that terrible start in 1928, the index actually ended the year with a 32% advance.

Famed investor, Shelby Davis, once claimed that “you make most of your money in a bear market, you just don’t realize it at the time.” Davis knew that down markets inevitably lead to people losing faith in the market.

For the long-term investor, downward volatility provides opportunities to buy quality stocks at bargain prices, provided you have cash / high quality bonds set aside to do so. Rest assured, you do…and that is precisely what the rebalancing process takes advantage of. However, it takes patience and time to come to fruition.

At the end of the day, we don’t know where the market will end the year. What we do know is that election years are very emotionally charged, so we expect markets, political commentary and media headlines to continue to be volatile. As always, cooler heads will prevail. Brace yourself for a volatile year, and know that we will keep a cool head throughout.