August 2016

This year’s elections, especially the Presidential race, have captured attention for months. On the heels of the party conventions this summer, we have had many clients inquire about our expectations for the markets depending on the election outcome. We turned to our trusted partners at Strategas, a leading research and advisory firm. Dan Clifton, partner and head of the Washington Office for Strategas, shared some interesting insights on historical election cycles that we wanted to pass along to you this month.

Dan, you’ve researched financial trends in Presidential election years. What trends have you been able to identify?

This will be an election for the ages. Despite the theatrics of it all, the potential shadow of the election, to say nothing of our new President’s policies, will be long and wide. There are 10 trends to be aware of in the final three months of the election cycle.

  1. The performance of the S&P 500 in the three months before the election has correctly predicted the success of the incumbent party 86% of the time since 1928.
  2. Regardless of the outcome, a relief rally follows the election.
  3. Since 1936, the market has performed better in the 12 months following a Democrat being elected than a Republican victory.
  4. Market highs are more often established in the fourth quarter of the fourth year of a Presidential election cycle than any other quarter.
  5. Conversely, market lows are more often established in the first quarter of the first year of a Presidential election cycle than any other quarter.

    S&P 500 Average Performance: November of Election Year Through Following Year 1936-2012Chart for August Newsletter

  6. On average, the best year for the market in the election cycle is the third, as Presidents gear up for reelection, and the worst is the first, as Presidents make tough choices with their newly attained political capital. In recent years, however, the cycle has shifted with year one being the best and year three struggling, depending on the timing of fiscal policy stimulus and austerity.
  7. These differences in yearly returns are more acute in Republican administrations than they are in Democratic administrations.
  8. The best scenario for the market lies with a Republican President and a Republican Congress. The worst performance occurs with a Republican President and Democratic Congress. Equity markets have generally rewarded divided government with a Democratic President and Republican Congress, as indicated in gray in the chart below.August Newsletter chart 2
  9. With the exception of President Hoover’s election, “third-term” Presidencies have been good for stocks in the first year of the new Administration.
  10. Federal Reserve (Fed) inaction during an election year has not always been the norm. The Fed was especially active in the Reagan years. Since 1984, there has never been a hike in the Fed Funds rate in the October of an election year.

 

This election cycle is sure to continue to earn substantial media and public attention in the coming months. Hopefully, these trends give you a sense for how things could play out depending on the election outcome. Thank you for the continued trust you place in Westwood Trust.

The analysis contained herein was conducted by a third party at a specific point in time and is based on information believed to be reliable, but no representation or warranty is made by Westwood Holdings Group, Inc. concerning the accuracy or completeness of any data compiled herein. Any statements non-factual in nature constitute only current opinion, which is subject to change. Any statements concerning financial market trends are based on market conditions, which will fluctuate. Past performance is not indicative of future results. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned.