Election Returns

voteNow that the midterm elections are safely behind us, a lot of people are wondering how politics will impact their investment returns. The conventional wisdom is that divided government–where one party holds the White House while the other controls the House, the Senate or both–is good for the markets. But is that true?

The truth is, there is no magic formula. The specific circumstances of each era, and the actions taken by each President and Congress, are much too individual and different for us to generalize. But the statistics are interesting nonetheless. Perhaps most interesting of all, the markets seem to like midterm elections regardless of who wins. The S&P 500 has gained in every six-month period following the last 16 midterm elections, with a remarkable average return of 16%. Going back a little further, from 1922 to 2006, the Dow Jones Industrial Average has jumped 8.5% in the 90 trading days following the midterms, versus just 3.6% in non-midterm-election years.

If you look at divided government vs. times when one party controlled both the White House and Congress, the results are a bit harder to interpret. The average annual total return for the S&P 500 when Washington is a one-party town has been 9.4%, compared with 10.6% when the parties were checking and balancing each other. However, another study going back to 1900 found that during times of total unity (67 of the 111 years analyzed), the Dow gained 7.6% a year. When Washington is locked in partial gridlock, in other words, where one party controlled Congress and the other the White House, (32 years in all), the index gained 6.8%. And during the 12 years of a gridlocked Congress, the S&P gained just 2% per year.

Since 1945, the pattern holds. Under total unity, stocks climbed at a 10.7% annual pace. Under partial gridlock, they gained 7.6% per year. And under total gridlock, which accounts for eight of the 65 years, they gained just 3.5% per year.

This gloomy news might be offset by another trend, however. Since 1900, the third year of a US presidency has been easily the best year for markets, with investors enjoying median annual gains of 16.5%.

There’s one other statistic to note, which might trump them all. It appears that the Standard & Poor’s 500 Index performs two or three times better when Congress is out of session than when at least one of the two chambers is at work. A famous quote from an 1866 New York court decision, that “No one’s life, liberty or property are safe while the legislature is in session,” would seem to have some truth for the equity markets.

Sources:

http://www.irishtimes.com/business/personal-finance/us-elections-entwined-with-stock-market-fortunes-1.1986324?page=1

http://www.ocregister.com/articles/singer-17484-percent-washington.html

http://www.slate.com/articles/business/moneybox/2010/11/election_day_prediction_buy.html

 

 

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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