How election years can shake up the stock market

The presidential election is just under a month away, but that’s ample time for the circus we’ve all been living in to become yet more bizarre. Who can predict what will be said, claimed, tweeted, leaked, accused, promised or lied?

Though the stock market is popularly regarded as a roller coaster, following its ups and downs is almost a relief by comparison. I, for one, am glad to focus on it. But with such polarizing candidates, with a recovery that’s still frustratingly anemic and with the American middle class having lost ground now for many years, you — like many of my clients — are probably wondering how each candidate's presidency would affect you financially. While I can’t predict how precisely a Hillary Clinton or Donald Trump presidency would impact the economy, jobs, health care, taxes or your wallet and livelihood, I can share with you some interesting historical data on elections and the stock market.

What history tells us

According to the Ned Davis Research Group, the Dow Jones Industrial Average (DJIA) has shown an average 7.6 percent gain on election years from 1900 to 2008. During the same period, it has increased an average of 15.1 percent if the incumbent party wins and dropped an average of 4.4 percent if the incumbent party loses. It has increased an average of 3.9 percent if a Democrat wins and an average of 10.3 percent if a Republican wins.

Before Democrats get their hackles up and Republicans start to gloat, inaugural years have tended to be better under Democrat presidents. In fact, according to S&P Capital IQ, from 1945 to 2015, the stock market on average has gained 9.7 percent a year (not solely election years) under Democratic presidents and 6.7 percent under Republican presidents. The worst record was under Nixon, a 5.1 percent drop, and the best under Ford, a 18.6 percent gain. (Both were Republicans, for those who are counting.) For reference, while we had quite a rocky start to the year, the Dow Jones closed out the quarter at a positive 6.33 percent.

In another recent study, Ned Davis Research looked at political control in the Oval Office and Congress (in all years, not solely election years) and its correlation with the S&P 500 from 1901 to March 2016.

• Democratic president/Republican Congress: 8.6 percent gain
• Republican president/Democratic Congress: 2.4 percent gain
• White House/Congress controlled by the same party: 7.1 percent gain
• Democratic president/split Congress: 10.4 percent gain
• Republican president/split Congress: 4.3 percent loss

The best performance since 1945, according to S&P Capital IQ, was on years with a Republican presidency and a Republican Congress (for some reason, Ned Davis Research didn’t break it down to Republican control in both branches and Democratic control in both branches). Experts are predicting that Congress will stay Republican. Therefore, no matter who is president, if history repeats itself, we are hopefully looking at excellent performance in the future.

Though all of this is interesting, for me it mostly underlines a market fact: The markets don’t like uncertainty, and presidential elections pose plenty of that. Wall Street much prefers the devil it knows over the devil it doesn’t. And after the dust and angst settle after an election and inauguration, the markets will see less political uncertainty and return to rising and falling based upon other indicators. It’s my belief that when this uncertainty does lift, we’ll see a more positive investment landscape than investors now appreciate.

Looking ahead

Can the stock market predict actually who will be the next president? If you’re willing to give it credence, the key to this theory is to look at the three months leading up to the election: Aug. 1 through Oct. 31. If stocks gain over those three months, the incumbent party wins; however, if stocks fall over this period, the other party wins. According to Daniel Clifton at Strategas Research Partners, the S&P 500 has “predicted” the winner 19 out of the past 22 elections. So, looking at some broad market indices, here’s where we are as of the last trading day before this column was submitted:

• The S&P 500 was 2,170.84 on Aug. 1 and 2,168.95 on Oct. 7.
• The Dow Jones Composite Average was 18,404.51 on Aug. 1 and 18,240.49 on Oct. 7.
• The Russell 3000 was 1,282.46 on Aug. 1 and 1,274.60 on Oct. 7.

All three are relatively flat in that period, just a touch down. Just like in the political arena, three weeks is a lot of time in the stock market. Regardless of what happens in either, I think we can all agree that this election has been one for the history books.

Jennifer Pagliara is a financial adviser with CapWealth Advisors. Her column appears every other week in The Tennessean. For more information, visit capwealthadvisors.com.