By FPA member Lydia P. Sheckels, CFP®, CLU, ChFC
Last Updated: August 2, 2012
You may have noticed that this is a very significant year for elections around the world, with more than 20 presidential elections scheduled in 2012. Results in Egypt, France, Greece, Mexico and Russia have each had their drama and so will the United States. Many are asking, “will the elections affect the stock market?”
For the U.S. election, much analysis has been performed to predict whether investors will benefit more from one party in the White House and/or controlling Congress. There are those who believe that the results of the election will affect stock market returns, and there are those who have concluded that it is the stock market’s returns that affect the results of the election. After studying both, I believe that there is greater integrity to the theory that the stock market influences presidential elections.
The Stock Market Picks the President
InvestTech Research of Montana has concluded that the direction of the stock market during the last two months prior to the election has the greatest influence on the outcome—and has been a predictor for 90% of the presidential elections since 1900. There have been only four exceptions to date: 1956, 1968, and 2004. A February 24, 2012 article about this research by Lauren Fox of US News summarizes the results. Of 28 elections during the period, there were 16 during which the stock market went up preceding the election and the incumbent was re-elected in 15 of them. There were 12 elections during which the stock market fell preceding the election and the incumbent lost in 10 of them.
This makes sense. Since the stock market reflects investor sentiment, the market goes up when there is more confidence about the economy and prospects for growth. Under those conditions, the incumbent can take some of the credit, and people are clamoring less for change.
The last several presidential terms have had tremendous headwinds in the first year. The terrorist attacks of September 11, 2001 occurred during President George W. Bush’s first year in office, with the aftermath carrying over to the term of President Obama, who also faced the financial crisis and market low in his first year. These unpredictable extreme events have cast a pall over the stock market that has been difficult to overcome, and included government intervention that affected the markets. Yet the stock market is resilient, recovering from its low in March 2009 at a much faster pace than many expected.
Investing based on politics and election cycles has its risks. You and I cannot predict the countervailing forces that will affect a president’s term and how Congress will respond to the challenges it faces. The best advice about the election is to vote for the candidate(s) you believe will serve us best, and to invest as a political agnostic.
FPA member Lydia P. Sheckels, CFP®, CLU, ChFC is the Executive Vice President and Chief Investment Officer with Wescott Financial Advisory Group, LLC, an SEC-registered, fee-only investment advisory and wealth management firm.