Election Year [2012] Market Performance

Republicans, Democrats, Conservatives, Liberals, Independents…
Obama, Romney, Perry, Bachman, Paul and Gingrich…

All those words stir up emotion and are great ways to fire up conversation at your next holiday party. But a lot of financial advisors overlook something important headed into an election year (2012): How will an election year impact client portfolios?
Looking back at history, how has the stock market performed during election years? Here are a few bullet points:

  •  S&P500 total returns 1926-2010, broken down by election year:
    • Year 1: 8.1%
    • Year 2: 8.9%
    • Year 3: 19.3%
    • Year 4: 10.9%
  • 1styear of a President’s term:
    • S&P500 is positive 52% of the time
    • S&P500 is negative 48% of the time
  • 2ndyear of a President’s term:
    • S&P500 is positive 64% of the time
    • S&P500 is negative 36% of the time
  • 3rdyear of a President’s term:
    • S&P500 is positive 90% of the time
    • S&P500 is negative 10% of the time
  • 4thyear of a President’s term:
    • S&P500 is positive 81% of the time
    • S&P500 is negative 19% of the time

Why are returns historically higher in the second half (years 3 & 4?) According to Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decisions Under Risk,” it’s because “Legislative risk aversion is often much lower. Presidents typically lose relative power at mid-term elections. They know this, and push for more major legislation in the front half when their power is likely to be greater. You can see this in history—more material legislation has passed in the front half of presidential terms, rather than the back. New legislation typically results in redistribution of money or property rights, or regulatory changes. Research shows people hate losses much more than they like gains, so when the likelihood of legislation is higher, overall risk aversion rises.”

And looking at the 2012 Presidential election, there are 2 obvious outcomes. President Barack Obama (Democrat) can be re-elected or his eventual challenger (Republican) will take power. Historically, the stock market has tended to have positive returns in either situation:

  • When a President is re-elected:
    • 14.5% – S&P500 average annual return when a Democrat is elected
    • 10.6% – S&P500 average annual return when a Republican is elected
  • When a President is newly elected:
    • -2.7% – S&P500 average annual return when a Democrat is elected
    • 18.8% – S&P500 average annual return when a Republican is elected

Fisher Investments did a wonderful job of summarizing the above stats in easy to use graphics. I put those into PowerPoint slides for you, which you can ACCESS BY COMMENTING OR EMAILING ME.

2012 will be a bumpy ride for sure. Who knows if these averages will play out of not? But one thing know for sure is you’ll look out for your clients when they need it most.  Thanks for all you provide Advisors Excel. Happy selling.
~ Matt

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