The United States Presidential Election is just over a week away. This day is all about answering one simple question – Obama or Romney? Democrat or Republican? Which president would be most beneficial for the broad equity markets? The answer may surprise you – or not.
The typical sentiment floating out there praises Republican politicians as the pro-business choice, and paint a picture of economic strength under their leadership, while Democrats will just drain the resources available and steer the markets into the ground.
But what does history have to say? As successful technicians in the markets, we know that what the media pedals is emotion and shock value first, fact and meaning second.
The Study
We set out to conduct a study to measure market movement around presidential elections and compare this performance for a true gauge.
We used the S&P 500 as a “market” measurement as it’s a broad index including 500 stocks. Using the Dow Jones, with 30 stocks, would not be completely representational, although the two indices are highly correlated.
The findings were generated by using the following process:
- List the past 7 presidential election dates and winners
- Track the S&P500 movement around election dates and performance thereafter
- Data for S&P 500 obtained from Yahoo Finance
- Study the findings and present any interesting occurences
- Arrive at a prediction of 2012 returns under a Democrat or Republican presidency term
The Findings
After running our queries according to our study parameters we compiled the following tables:
Table 1.0 – Past Presidential Elections
Table 2.0 – Average Democrat & Republican Returns
We notice that election days tend to be quiet in the market, as investors await the results of voters, which are in fact the same sets of people. Typically, the following day after elections we saw an average move of less than 1%, but these returns tended to be much more volatile when Democrats won the election, averaging -1.50% as seen in the next table.
This greater volatility can be due to investor discouragement as they presume a democratic party is not pro business and will bring about lackluster returns, causing a near term sell off.
However, if we look further out, we notice that after one full year passes the Democrat president markets begin to outperform the Republican counterpart. Interestingly enough, after one year, on average, Democrat markets surpassed the returns of Republicans almost 300%, at 15.79% average return versus a mere 5.78%.
The real amazing finding is that this trend didn’t stop there. Again, like trading, the trend is your friend, even in politics. Democrat presidents returned a presidential term (4 years) average of over 70%! Republicans come in at less than one third, with a return of 21.06%!
Furthermore, the only two losing terms were held during the George Bush Jr. presidency (Republican), earning negative returns in both terms of -21.06% and -11.04% respectively (-32.10% over entire 2 term presidency). The highest term return was during Bill Clinton’s second term (starting in 1996), yielding 102.60%!
Conclusion
These tables illustrate a bleak picture for Republican presidency candidate Mitt Romney, and would be a useful tool of ammunition for Obama’s party, as they are not the obvious choice for investors seeking higher returns.
The averages, as illustrated in Table 2.0, would suggest that the upcoming fiscal year can add over 15% value to our equity market if Barack Obama is re-elected for a second term. Additionally, by the end of his second term, Mr. Obama would be projected to oversee a broad market rally of over 70%, ending the 2016 year.
Of course, it’s not always that simple, and there are many factors not accounted for in this study, which runs the risk of over simplifying the matter. However, we all know the KISS acronym very well – Keep It Simple…
Including all 56 presidential elections and studying the markets is one way to gain a more accurate average of the broad market returns. This study would have you travel back in history to the first president election in 1789. There are many challenges to be overcome if we extend the study this far out, which is beyond the scope of this post. We stuck to the recent history, dating back to only 1984. Only, however, is still 28 years ago!
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