HOW DOES THE PRESIDENTIAL ELECTION CYCLE AFFECT THE STOCK MARKET?
Research has shown a correlation between stock market performance and the four year presidential election cycle. In a study going back to 1950, Charles Schwab found the following results comparing the cycle to the S&P 500:
- Year after the election: +6.5%
- Second year: +7.0%
- Third year: +16.4%
- Fourth year (Election Year): +6.6%
The election cycle theory is predicated on the view that a shift in presidential priorities is a primary influence on the stock market. After entering the Oval Office, Presidents have a tendency to work on their most deeply held policy proposals and indulge the special interests of those who have gotten them elected.
In the third year, as the next election looms, the model suggests that presidents focus on shoring up the economy in order to get re-elected. As a result, the major stock market indices are more likely to gain in value. According to presidential election cycle studies these results are not affected by the political affiliation of the Commander-in-Chief.
A word of caution: Although data from the past several decades seem to support the notion of a stock surge during the second half of an election cycle; the limited sample size makes it difficult to draw definitive conclusions.
