With presidential politics front and center in the media during a fluctuating stock market, it’s important to focus on what the electoral process means to the financial markets.
I spent eight years in the banking industry, so a recent report by the Morgan Stanley Global Investment Committee – “Do Presidential Elections Impact Markets?” – caught my eye. The report found that:
- Election-year returns have averaged 7 percent, with gains concentrated in the summer. We’re all looking forward to that.
- However, while the third year of a presidential term has typically been the best-performing for stocks, prices were slightly negative in 2015, which has only happened three other times in the last 88 years. Hmm…that might not be good.
- The market generally sees higher returns initially when the president is re-elected compared to when a new president comes in. There is no president to be re-elected this time, of course.
- Recessions have typically occurred in the first year of a president’s term. Luckily, the risk is currently low.
- The market sometimes prefers divided party control, gaining more than 13 percent annually under Democratic presidents with GOP-controlled or split Congresses since 1928. When either party had total control, returns averaged 9.5 percent. Interesting.
- During election years, energy, financials and health care have typically led the market.
- Finally, the report found that historically stocks perform better with a Democrat in the White House.
You can draw your own conclusions, but the numbers don’t lie.