Much has been written about how stocks perform relatively well during an election year.However, no one provides quite the detailed moment-by-moment historical look as stock market historian Sam Stovall. From his latest Standard & Poor’s Stovall’s Sector Watch:
If 2012 were a normal presidential election year, investors would approach the year in a very cautious fashion, as the S&P 500 would likely experience declines in the first two months. Then, possibly as the respective presidential candidates become a bit more certain, the S&P would post fairly healthy advances in the months leading up to the summer conventions. The market would then experience a post-convention slump before picking up steam again toward the end of the year after the election had concluded and the uncertainty had disappeared. In all, if 2012 is to be a normal presidential election year, the S&P 500 would rise only 0.34% during the first 10-months of the year as investors anguish over the upcoming election. The S&P 500 would then jump nearly 1.0% in the remaining two months of the year as the election uncertainty was removed. Along the way, however, the S&P 500 would experience a decline, sending the broad benchmark to an 8.4% year-to-date decline, which would only be a shade better than the average 8.8% year to date (YTD) decline experienced annually since 1948.
However, the most interesting tidbit from his note may be the correlation between stock market performance and who becomes elected president:
The S&P 500’s price performance during the three calendar months leading up to the presidential election has been a good predictor of whether the president or his party would be re-elected or replaced. 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). Therefore, pay attention to the market’s performance in the three months leading up to the presidential election, as it will probably do a better job than the plethora of political pundits prognosticating on the presidency.