As the election cycle kicks into full swing, it is useful to take a look at what history tells us about equity market returns during presidential election years. Given that the popular S&P 500 (IVV) first debuted in its current form on March 4, 1957, I took a look at all presidential election years dating back to 1960. Since that time, there have been 13 presidential election years, 10 of which saw positive returns for the S&P 500 SPY and only three of which ended with negative returns. This 77% success rate is even more impressive when considering that 2000 and 2008 declines can be attributed to the equity markets finally realizing there were bubbles that needed popping (tech and excessive leverage) and stocks reacting accordingly.
Here is a table outlining the returns from each of those election years:
S&P 500 returns
Will 2012 follow in the footsteps of the 77%? Here are three things to consider:
The European situation is obviously still at the forefront of every investor's mind, and should the EU weaken further, there will be some hit to the earnings of many stocks trading on U.S. exchanges. Also, deleveraging by European banks, especially the systemically important financial institutions, could spill over to the U.S. markets in the form of forced selling. This would be the scenario that could lead to returns on the Dow Jones Industrial Average (DIA), S&P 500, or the Nasdaq 100 (QQQ) looking like those of 2000 or 2008.
A second, less attention-grabbing, but also important, thing to watch in 2012 is how the top weighted stocks in each of the major indices perform. International Business Machines (IBM) and its 11.08% weighting in the Dow is certainly one to keep an eye on. With IBM's growth rate projected to slow in fiscal year 2012, from roughly 16% in fiscal year 2011 to roughly 11% in 2012, could there be a multiple contraction that puts a cap on upside potential or even potentially causes a drop in the price? Furthermore, will IBM live up to expectations in terms of the dividend increase that many expect to occur by the time it goes ex-dividend in May? At 1.66%, will the dividend-crazed investors from 2011 be willing to continue to step in and buy IBM in 2012? It's something to keep an eye on.
In the S&P 500, Exxon Mobil (XOM) and Apple (AAPL) are currently the top-weighted stocks at 3.51% and 3.36% respectively, and will have the most influence of any two stocks on S&P 500 returns in 2012. Will oil prices stay at triple-digit levels, helping XOM to break out above its 2011 high of $88.23, thereby helping to pull the S&P 500 up with it? With respect to Apple, perhaps the single most loved stock in the history of world equity markets, it's hard to even think of a reason why this stock wouldn't just keep going higher. People are obsessed with its products, its cash hoard is large and growing, and its stock continues to keep making higher highs and higher lows since March 2009.
What in the world could go wrong for Apple and its massive 15%+ weighting in the Nasdaq 100? Perhaps I am grasping at straws, but even though the thought of incurring the wrath of untold numbers of smitten Apple investors is enough to strike fear into the heart of any writer, I will nevertheless ask the following four questions regarding Apple's stock: Are growth investors already all-in on the stock? If Apple doesn't relent and begin to pay a dividend, will it have trouble attracting new types of investors going forward? Why is the forward P/E so low? And, do you think there will be a multiple expansion going forward given how well-known the amazing Apple story already is? Think about these things as the year progresses. Whatever lies ahead for Apple's stock in 2012 may very well also be the future of the Nasdaq 100 and other major market averages.
A lesser known January barometer for the S&P 500 just gave a screaming buy signal. As I discussed in a recent article, never before has the S&P 500 failed to end the year in positive territory when certain conditions were met during the first five trading days of the year. For more details on just what those conditions are, please read my article "History Says Stocks To End 2012 Higher."