Markets have been unusually volatile so far in 2016, with plunging oil prices, slowing growth in China, steep declines in overseas equity markets, fragility in the high-yield bond market and uncertainty of who America's next president will be.
Every four years, politics and finance come together as Americans elect a president and investors try to determine what the outcome means for their portfolios. History shows that the presidential election cycles indeed correlate with stock market returns -- up to a point.
In the election year itself, the market has a tendency to fall, especially in the final year of a president’s second term. It turns out that the stock market has an uncanny ability to predict which party will call the White House home for the next four years. If the stock market is up in the three months leading up to the election, put your money on the incumbent party. Losses over those three months tend to usher in a new party. According to Jim Stack, a market historian and publisher of the newsletter InvesTech Research, the S&P 500 has an 86.4% success rate in forecasting the upcoming election.
These statistics are somewhat compelling. In the 22 president elections since 1928, 14 were preceded by gains in the three months prior. In 12 of those 14 instances, the incumbent won the election. In seven of eight elections preceded by three months of stock market losses, incumbents were sent packing. Exceptions to this rule occurred in 1956, 1968 and 1980.
Regardless of how remarkable the relationships between election cycles and the stock market sound, they should not dictate your investment decisions. Instead your behavior should follow the basic fundamentals of investing such as understanding risk, diversification and market timing.
We constantly review our clients’ portfolios to make sure they still reflect their target asset allocations and goals. We encourage clients to resist the urge to buy and sell based solely on recent market movements, or who’s ahead in the election derby. It pays to stay the course!
If you haven’t reviewed your portfolio or updated your financial goals in a while, contact our wealth management team today today. Have a great week.
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