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  • The Potential Impact Of This Presidential Election On The Stock Market 2 comments
    Aug 29, 2012 12:58 PM

    With the national political party conventions now upon us (Ex. the Republicans kicked-off their weather delayed national convention in Tampa, FL yesterday), a great deal of media, and investor, attention has turned to following the daily polling trends to try and gain a sense of whom will likely occupy the Oval Office for the next four years. The challenger, Republican Mitt Romney, is running in a virtual dead heat against incumbent, Democrat President Barack Obama at the moment based on a variety of polls that we have observed.

    The outcome of this presidential election, in addition to many of the concurrent congressional races will have a large impact on tax policy, health care reform and federal regulations for months and years to come. This has created a great deal of uncertainty in the mindsets of many small business owners and households across the United States. For these reasons, many of these individuals are taking a "Wait and see" approach to the balance of the year, preferring to wait until after the Fall elections before making any major spending or hiring decisions. This tentative stance could likely further restrict economic and stock market growth over this time period.

    While this presidential election, its results and its effect on the stock market and globally interconnected economy may be different this time around, we, at Hennion & Walsh, have observed that it can often be helpful to frame today's events in a historical perspective when determining key investment strategy decisions. Hence, we thought it would be beneficial to provide a historical overview of how the stock market has reacted to the outcome of various U.S. presidential elections.

    According to a MFS Investment Management research report entitled, "Primaries, caucuses, and elections…oh my!", based on data from Ned Davis Research, from 1900 - 2008, the stock market, as defined by the Dow Jones Industrial Average (DJIA), performed better when the incumbent party won each given election, regardless of the political party of the incumbent, through market performance has been better historically under Republican Presidents as opposed to Democrat Presidents according to this research.

    Time Period Average Return for the DJIA
    President Election Years Overall +7.6%
    Incumbent Party Wins +15.1%
    Incumbent Party Loses -4.4%
    If Democrat Wins +3.9%
    If Republican Wins +10.3%

    However, perhaps even more important to stock market performance than who is in the Oval Office after the presidential election is which political party is in control of Congress. To this end, based on the same MFS research report, it appears that the combination of a Democrat President and a Republican Congress has produced the best historical returns from 1961-2010, on average, for the stock market - which is defined in this case by the S&P 500 index (S&P 500).

    Political Control Average Return for the S&P 500
    Democrat President / Republican Congress +21.3%
    Republican President / Democrat Congress +4.5%
    White House / Congress Controlled by Same Party +12.1%
    Either Party in White House / Split Congress +7.1%

    Please note: The Dow Jones Industrial Average (DJIA) measures the U.S. stock market. Figures referenced are price change only and do not include the impact of reinvested dividends. The Standard & Poor's 500 Index (S&P 500) measures the broad U.S. stock market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

    We will certainly be closely watching the political races as the calendar gets closer and closer to Election Day in November. However, while the recognition of historical market trends such as the ones discussed in this blog posting above can prove beneficial, we still contend that greater emphasis should be placed on accurately defining an investor's specific financial goals, income needs, investment timeframe and tolerance for risk when designing a custom tailored, asset allocation strategy that allows for an investment portfolio to perform in different market environments.

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Comments (2)
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  • Andrewskyhigh
    , contributor
    Comment (1) | Send Message
    what are the periods of time associated with the percentages? i.e. White house / Congress controlled by same party equals a 12.1% increase over the next 3 months? 6 months? year? 4 years?


    31 Aug 2012, 07:58 AM Reply Like
  • Kevin Mahn
    , contributor
    Comment (1) | Send Message
    Author’s reply » The research states that the data provided is total return per year on average.
    31 Aug 2012, 10:53 AM Reply Like
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