Election Cycle Investing Trends

It's that time when the air gets hot again with election year rhetoric. Have you noticed that although the stated discourse is about "the issues," all the energy and much of the actual voting is emotional in character? Our human predilection to do so is disappointing, frustrating and harmful but there are apparent trends related to the election cycle that we might factor in to our financial decisions that could give some mild relief. Or add to our confusion, depending upon your point of view.

The Wall Street Journal

Recently, Joe Mullich reviewed the subject of these patterns in and it got my crack research staff scrambling to see what correlations might hold up. It's interesting to speculate on trends but don't look for any certainties here upon which to bet your hard-earned, managed care bucks. The old idiom "past performance does not guarantee future results" still holds true.

In a presidential election year it is claimed that there is a tendency for the market to rise. Hope, if not euphoria, does spring eternal it seems — especially with all the wild-eyed promises from both sides flying about. And this trend seems to hold no matter which party prevails. Election year promises may wear different clothes from each party, but they both cover the same pandering motives. It sort of gives the lie to the claim/hope that rational policies hold sway over market psychology. For (weak) proof, consider that "the S&P 500 has seen gains in the last 7 months in 13 of the last 15 elections since 1950."

The Stock Trader's Almanac

has identified that the third and fourth years of a presidential term tend to be bull markets, while the first and second years see market declines. In other words, to be a tad cynical, the market seems to rise upon election expectations and fall upon delivery.

Whatever the explanation, multiple studies have confirmed the trend. For instance, Wells Fargo found that returns in the fourth year of a presidential term doubled those of the first year. And Professor Nickles of Pepperdine University showed that a $1,000 investment in each of the latter half of presidential terms from 1950 on would have returned about $73,000 to date, while the same monies put in the first and second years would have lost money.

It appears that a new president tackles the tough, ugly stuff early and then, looking to be reelected — along with the co-dependent Congress thinking the same thing — puts money into the pockets of voters in the second half of his term. And the Fed seems to pile on as well with expansionary policies in 65% of the fourth year of the term, compared to 48% of the first three years.

There are exceptions, such as when the Great Depression caused the Dow to fall 53% in an election year. And it remains to be seen what will happen this year, coming out of what Nobel Prize-winning economist Paul Krugman describes in his new book as an actual depression, not the Great Debt Recession, as I've called it.

One area of research into political associations, whose results may surprise, is that the stock market has performed consistently better under Democratic dominance than under the Republicans. Republican administrations demonstrated growth of about 2% over the average T-bill return, but the Democrats have delivered a whopping 11% overage.

If those numbers hold true for periods of dominance, what about when the country is living with gridlock, as we have seen in recent years? It appears that gridlock is good for financial markets. Because little of consequence is being done by Congress, rightly or wrongly for the country's well-being, financial predictability is enhanced.

While we're talking about reading tea leaves, Mullich also touches on the much-discussed phenomenon that when the AFC wins the Super Bowl in a presidential election year, the market declines and when the NFC wins the market rises. This observation has held true 85% of the time since the first Super Bowl. It doesn't make any sense, but it is statistically significant. (Just like some medical studies that come to mind, unfortunately.) Anyway, based upon that association, the NFC's Giants' 21-17 win over the Patriots this year should bode well for those of us in the market.

So we ask ourselves what does this all mean and should I actually talk to my financial advisor about taking some kind of action? The depth of these statistical associations is questionable, many economists counter, and the whole thing smacks of a two-drink cocktail party conversation. But if you think these trend-seeing folks are on to something real, try a small side investment (read: BET) this year and see what happens. But with a wink, I'll wager that those who make an investment based upon these trends, no matter what the outcome, will say or think "I knew it!”

Read more:

2012 DABLAR Study Reveals Average Investor Returns

Investing in the Face of Earnings Potential Uncertainty