Photo: Wikimedia Commons
There are just four months until election day, and the presidential campaign rages on.Some market historians have noted that there are some distinct patterns when it comes to elections and stocks. Specifically, many remind us that election years tend to be good ones for stocks.
Are these correlations totally spurious?
“No,” argue many experts. Goldman Sachs’ Jose Ursua, Professor Robert Prechter, and S&P Capital IQ’s Sam Stovall are among the experts who argue that election cycles have major economic and behavioural implications for the stock markets.
We compiled everything we’ve heard about the relationship between stocks and politics. Maybe, you’ll find it to be a useful guide to the stock market. And perhaps even the election.
On average, the third year of a presidency is by far the best year for stocks, with double digit returns.
That's not to say it's always the best year. 'However, as can be remembered vividly, this approach did not work at all in 2008,' warns Citi's Tobias Levkovich.
From Goldman Sachs' Jose Ursua: 'Volatility often sees a first post-election blip (as markets digest changes) and then a gradual increase towards the second year of the cycle.'
Source: Goldman Sachs
U.S. election cycles explain more than just U.S. equity returns. From Goldman Sachs' Jose Ursua: 'In particular, the election cycle in the US helps to explain a sizable fraction of non-US equity returns, both in other developed markets and in emerging markets.'
Source: Goldman Sachs
The 3-month stock market performance preceding an election is an amazing predictor of election outcomes
From S&P Capital IQ's Sam Stovall:
'An S&P 500 price rise from July 31 through October 31 traditionally has predicted the reelection of the incumbent person or party, while a price decline during this period has pointed to a replacement. Since 1948, this election-prognostication technique did an excellent job, in our view, recording an 88% accuracy rate in predicting the re-election of the party in power (it failed in 1968). What's more, it recorded an 86% accuracy rate of identifying when the party in power would be replaced (it failed in 1956).'
Source: Stovall's Sector Watch