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Election Cycles and the Stock Market
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Elections And The Stock Market
There's a double header of Presidential Primary debates this week. The Republican debate is Tuesday and the Democratic debate is Saturday. After these two, there is a lull until December. 2WTK asked Matt Logan to look at how Presidential cycles affect the stock market. Here are his thoughts:
The four years of a presidential cycle, according to the markets?
To start, lets look at averages for each president's term. This is looking at the S&P 500, an index of the 500 largest companies in the United States since the year 1945. Many people see this as a good gauge of the overall stock market. You can see that the third year of a presidency has a statistically significant higher return than other year. Does that mean the market will hit that number this year? Absolutely not, this is just an average what has happened in the past. If it were that easy, everyone would take advantage of it and my job would be a lot easier. You can also see on the right, the percentage of those years that showed gains. I also found this interesting as the third year of a presidential cycle showed gains the highest percentage of time. In my research, many people theorized that this was because a President's actions in his first two years of office begin to show results in the third year.
Is there a difference in returns based on party in presidential office?
I really found this next chart interesting. It showed the market performance per year of the presidential cycle dating back to 1926 and divided it based on political party. You can see that the blue represents a Democrat in the Oval Office and the red is when a Republican held the Presidency. It is interesting to see the difference. I am by no means saying that either party is better for the stock market. There are other parts that come into play such as the overall market that can skew these numbers.
- As you can see, the first term for Obama was very positive for the S&P 500 returns. Some economists would argue that this was because he started after such a sharp drop in the market that it was bound to have high gains. Either way, this chart looks at the numbers on average for a presidential term. You can see that the blue line shows the average presidential term market performance from 1953 to 2012. The red line was Obama's first term. The yellow line is Obama's second term through the end of July, 2015.
What does this tell us?
Well, this tells us what has happened in the past. The third year of a presidency has shown the highest returns on average. The Obama administration thus far had its highest returns in the first year he was in office. There is no way to predict the markets performance based on any one factor but if you have a hint of "financial dorkiness" in you that I have, these numbers are great food for thought
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