Politics and the Markets
May 25, 2016
Every two years the topic of politics and its impact on the market takes center stage in the media and can have an impact on our markets. We manage money for over 1,200 clients who have beliefs that run the full political and ideological spectrum. I will be keeping this educational piece as clinical as possible. This month’s article will simply be about the impact politics have on the market.
On the whole, election years have not been bad times to invest. As you can see from the chart below, historically the markets have rallied during the second half of an election year, especially if the incumbent party retained power. From 1901 through 2012, the Dow Jones Industrial Average has produced over a 5% return for all election years, a 12% gain if the incumbent party won the election, and a 3% loss if the incumbent party lost.
I thought it might also be interesting to break down each year of a presidency and see how the S&P 500 performed since 1945. As you can see below, 88% of all election years have had positive returns, with the average return of 9.83%. Election years have the second highest percentage of positive years during a presidential cycle. As you can also see, the third year in a presidential cycle has been the strongest. Since World War II, there has not been a negative 3rd year of a presidency, with the average annual return being an astounding 19.08%. The year 2015, while slightly positive after dividends, wasseverely below the average for a 3rd year presidential cycle.
Source: S&P Dow Jones Indices; Polaris Greystone Financial Group
I also decided to take a slightly different look at the impact of the presidential cycle to see how the markets performed during a president’s second term. As you can see from the table below, Barack Obama will be the sixth president since World War II to fulfill eight years in office, so the sample size is quite small.
I found a couple of interesting things from this additional analysis. My first observation was how much better the performance was in the first two years of a president’s second term as compared to years 1 and 2 for all presidents. It would seem (in most cases) investors were trying to determine if the policies of a new president were going to be beneficial to the markets, whereas the markets seem to think that a second term president would be able to continue the positive momentum of their first term. The second insight was comparing election years of first term presidents compared to elections at the end of a second term (comparing years 4 and 8). The markets have been very strong during election years after a president’s first term. There hasn’t been a single negative year, and the average total return in the S&P 500 was 14.80%. This is noticeably better than the second term election years, where the S&P 500 has only experienced positive returns 60% of the time, with an average annual total return of -2.11%. My only assumption is that the markets don’t like lame duck presidents and fear the unknown of having a new administration taking power.
Source: S&P Dow Jones Indices; Polaris Greystone Financial Group
Which Political Party Has The Best Markets?
The answer is neither of them. When the Republican Party controls the presidency and Congress, the Dow Jones has produced slightly over 7% annually. When the Democrats have controlled the presidency and Congress the Dow Jones has performed slightly over 7% annually. The Democrats hold a 0.14% better performance when they are in complete control.
Having a balance of power has often yielded the best performing markets (as seen below). Having a Democrat as president with a Republican controlled Congress or a Congress that has split power between both parties has yielded better returns than if both parties are in complete control. Having a Republican president with a Democratic Congress, or a split Congress provide the two worst performing options.
Source: Ned Davis Research, Inc.
What Happens From Here?
The markets don’t like the unknown. Unless something truly unprecedented happens, Donald Trump will be running against Hillary Clinton to become 45th President of the United States. There are few, preliminary polls out on Trump vs. Clinton. Those that I have seen show a very close race. While this doesn’t have to have an impact, a close political race could impact the markets.
Political turmoil is one of many headwinds that could impact the markets this year. That said, there are just as many great reasons to invest in the markets as there are reasons to be concerned. This is why we tactically manage money.
We often equate our investment style to driving. If it’s nice and sunny out, with few cars on the highway, we can speed. But if the roads become crowded, if the weather changes, or if the road conditions change, we slow down. We lower your allocation to the stock market and move your investments into areas that have been historically defensive. Your overall allocation is dependent on the strategy you have selected. Regardless of strategy, Polaris Greystone is always balancing risk with opportunity. We are always looking to add value by overweighting sectors, asset classes, or international regions where we see strength. All of our strategies will play “defense” when we assess risk to be rising beyond a tolerable threshold. We are not afraid to aggressively play defense or eliminate investments in segments of the market where we see significant weakness. It is our ongoing duty to balance the true risk in the market with opportunity cost, something we pride ourselves on doing so well.
We welcome you to review your portfolio with your Wealth Adviser to ensure that you are in the most appropriate strategy to help you accomplish your long-term goals.
As always, I welcome your comments and questions.
Jeffrey J. Powell
Polaris Greystone Financial Group, LLC is a federally registered investment adviser. The information, statements and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Advisory services are only offered to clients or prospective clients where Polaris Greystone Financial Group, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Polaris Greystone Financial Group, LLC unless a client service agreement is in place.
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