Market Returns During Election Years
Market returns reflect the aggregate expectations of market participants. Their various risk aversion, investors' tastes and preferences, and expectations about future profits are a few inputs that affect aggregate expectations. Election years are filled with uncertainty, adding more inputs into the expectations of market participants. Who will be the next president? How will his or her views affect business, taxes, and policy? What can we expect of market returns during election years? The long and short answer; it's difficult to find a systematic return pattern in the data during election years. Market expectations of election outcomes are embedded into security prices. However, based on the research, market returns have been positive in both election years and the year following an election year on average. One might expect these election expectations to affect the US stock markets more so than international, emerging, or US bond markets. An evidence-based investor knows not to follow what they might expect, but rather what the academic research proves. In addition, a prudent, evidence-based investor knows that they invest in a globally diversified portfolio of asset classes. Thus, it's important to not only focus on one stock market index such as the S&P 500, but rather break down the affects of presidential election across various asset classes.
U.S Large-Cap: S&P 500 Index
International Developed Markets: MSCI EAFE Index
Emerging Markets: MSCI Emerging Markets Index
US Bond Market: Barclays Capital US Aggregate Bond Index
As you can see from the above illustrations, the US stock market often performed better in election years on average than the other asset classes listed. Would you have guessed that outcome? To top it off, all of the asset classes listed above did well on average during election years. In years where the market did not perform well during an election year, they often made up for the negative performance in the subsequent year. Although January has been a rough start for 2016, this research gives us yet another reason why trying to time short term market fluctuations is often a mistake. Investor's should follow a long-term plan based on academic research.
Past performance is not a guarantee of future results. Data as of December 31, 2015.
Sources: The S&P data is provided by Standard & Poor's Index Services Group; MSCI data copyright MSCI 2016, all rights reserved; Barclays Capital data provided by Barclays Bank PLC.