Got a kick out of the Iowa caucuses this week? Then you're in for a treat: The U.S. presidential election campaign's 10-month thrill ride has just begun!
The presidential race that began on Tuesday won't end until Nov. 6, with a plethora of caucuses, primaries, speeches, conventions, debates – not to mention wall-to-wall media coverage – in between. It's a veritable feast for political news gluttons.
But wait – you say you don't find this meandering, long-winded process to your taste? Never mind. Your stock portfolio may just eat it up.
VOTING 'YES' FOR ELECTIONS
History shows that presidential election years are generally positive – if only modestly so – for the stock market. It has been the second-best year of the presidential cycle for S&P 500 returns, noted economist Paul Dales of London-based Capital Economics.
Admittedly, the returns have been far from overwhelming: Since 1928, they have averaged just 5 per cent, or roughly 3 per cent after adjusting for inflation. But election years have produced positive market returns 71 per cent of the time, compared with 63 per cent in non-election years.
The odds of a winning year get even better if you look only at the post-war period. BMO Nesbitt Burns economist Robert Kavcic noted that 80 per cent of post-war election years have resulted in a positive S&P 500. And while the post-war average return is still a muted 6.1 per cent, he pointed out that this was badly skewed by the horrendous 38.5-per-cent market plunge in 2008; if you looked at the median return rather than the average, you'd get 9 per cent, about in line with non-election years.
HOPE OUTSHINES REALITY
The numbers are consistent with what one might guess – investors, listening to the candidates' platforms, would reasonably be cautiously optimistic that the next administration would take steps to improve economic conditions and spur growth.
But an even stronger force on the market appears in the year before the election, which is by far the best year of the presidential cycle for markets. That's a time when "incumbents have been keen to boost the economy as a means of appealing to voters," Mr. Dales argued.
When you combine the market's performance for the pre-election year and the election year, and compared them with the two years following the election, you can vividly see how pre-election promise and posturing gives way to post-election reality. Average combined annual returns for the pre-election/election years in the post-war period are 12.2 per cent, more than double the average for the two post-election years; 90 per cent of pre-election/election years have produced gains, compared with 56.7 per cent of the post-election years.
David Parkinson