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The Truth About Election Years!
Next year is a Presidential election year, and the stock market is almost always positive in election years. Right? At least that assurance has been a supposed truism for many decades, and repeated as fact each year in numerous interviews and financial columns.
And it makes sense.
After all, the Four-Year Presidential Cycle has an unusually consistent pattern of the market experiencing most of its serious corrections in the first two years of a Presidential term and most often making a substantial recovery in the last two years. The pattern was interrupted when the financial crisis hit and 2007 and 2008, the last two years of the Bush Administration, experienced a serious bear market. But the circumstances were unusual, and the few times over the last hundred years that the cycle did not hold true to form did not affect the long-term percentage of the cycle.
It also makes sense that election years would be positive as each Administration pulls out all the stops to make sure the economy and stock market are positive when re-election time arrives.
But it’s just not true. I studied all election years since 1920, and here’s how the Dow fared in each. I included whether it was a Republican or a Democrat in the White House in case that made a difference.
Of the 23 election years 15 were positive, or 66.7%.
However, ignoring whether or not they were elections years, over those 91 years 62 were positive anyway, or 68%.
Conclusion: The market was up in 68% of years overall, and 67% in election years. So, whether it was an election year or not had no effect on the market’s performance.
Of the 23 election years, the market was up 63.3% of the years when a Democrat was in the White House, and 66.7% when it was a Republican.
Conclusion: It makes no difference which party is in the White House at election time.
So it seems investors will not be able to rely on an election year ‘indicator’ to guide them through the market next year.
Coming next is my study of whether an election year has any influence on the market’s annual seasonality of usually making its best gains in the winter months and experiencing most of its serious corrections in the summer months.
Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.