Banking on a Strong Stock Market? Vote to Re-Elect

(25 August 2020) With the US presidential election less than three months away, an interesting finding published back in 1967 by stock market research Yale Hirsh in the Stock Trader's Almanac presents a distracting tidbit for data lovers and market watchers alike: stock market performance is interconnected with electoral cycles. Hirsh's "Presidential Election Cycle Theory" decomposes US presidential terms by year to show that year three of a US president's 4-year term is usually the strongest year for the market. 

This 60 year old tidbit has still more to offer. When you consider whether the incumbent party won or lost as well as whether the president is in his first or second term in office, you'll understand why if the S&P 500 had a vote, it would be for incumbent Donald Trump. And, if the theory were to hold, the reward would be higher returns over the period from 1 November 2020 to 31 October 2021* as the world prepared for the Trump's second term.

• Spanning Nixon to Trump (1972-2020**), election of the candidate from the sitting president's party was followed by 15.7 percent growth of the S&P 500 during the 12 months following the election. On the flip side, when the challenging party took the White House, the S&P 500 averaged nearly zero growth for the same 12 month post-election period.
• Looking instead at two-term US presidents, the data shows that, on average, the second term was accompanied by a 14.4 percent increase of the S&P 500 compared to just 3 percent growth if a new president was elected.
• So far during Trump's presidency the S&P has grown by 61.4 percent, which is the fourth best performance for any presidential term since 1972, a remarkable fact given that 2020 carried the United States' into its deepest economic crisis since the Great Depression. 

Stay tuned! Coming up next in our US election coverage we'll go beyond the headlines of market fluctuations and elections to present data to help evaluate relationships between economic performance and electoral cycles.

* For simplicity, 1 November is used as the proxy for the US general election voting day. Percent changes are calculated from 1 November.

** Data is incomplete for the 4-years of the Trump Administration and will be updated as the end of the term approaches.