wealth management services

Our clients are our greatest assets
8335 Allison Pointe Trail, Suite 135 Indianapolis, IN 46250, Phone 317-818-1040
Friday, 04 November 2016 08:46

Election Season and the Stock Market

Written by

As Tuesday, November 8 gets closer and closer, we receive several questions and concerns about how the presidential election will affect the stock market. I'd love to say we had a crystal ball that would tell us who the next president would be and how that person would influence the markets, but we have yet to find it. Perhaps the best way to address these concerns is to take a look at past elections. While historical data is no guarantee of future results, it can be a good barometer of what we might expect in the next few weeks.

For example, take a look at the graph below. There is a dash for every month from January 1926 to June 2016, placed into a column that represents the return of the S&P 500 for that month (the S&P 500 measures the performance of the 500 largest companies in the United States). 

chart1

The gray dashes are normal months, while the red and blue dashes represent months an election was held. Take a look at the tallest column in the middle of the chart; this shows that the most common range for monthly returns has been 1-2% during this time period, and two election months have fallen in that range. Overall, the returns in election months fall within the normal distribution without any clear pattern or wild outliers, making it next to impossible to predict what the election may bring. If anything, returns don't deviate too far from any normal month in most cases.

Hopefully, this can give us some confidence that there will not be a drastic short-term overreaction once we find out who the winner of the election is. But what about the long-term effects of our choice for commander-in-chief? The next chart provides a look at the markets for the last 90 years, coupled with who was in office. 

chart2

Again, there is no clear pattern based on which party was in the White House. The only pattern here is the steady increase in the market over the long-term. One caveat might be that this year's election seems very unique and could present some new and unforeseen effects, but predicting those effects would be difficult, if not impossible. It is important to remember that for every investor who is worried about a particular candidate, there is probably an investor on the other side of the spectrum who is equally excited about the same candidate, and that type of trade-off is what makes markets efficient. No matter what happens on November 8, we are confident in the efficiency and the long-term prospects of the US stock market. 

Charts courtesy of Dimensional Fund Advisors

Last modified on Monday, 05 December 2016 16:55

Leave a comment