How Will This Election Affect The Stock Market?

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Includes: DIA, IWM, QQQ, SPY
by: Kevin Mahn

Summary

It can often be helpful to frame today’s events in a historical perspective when making key investment strategy decisions.

The stock market performed better when the incumbent party won each given election, regardless of the political party of the incumbent, though better under Republican Presidents.

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.

While the recognition of historical market trends is important, emphasis should be placed on accurately defining an investor’s specific financial goals, income needs, investment time frame and tolerance for risk.

With the national political party conventions now behind us, many investors and financial advisors have been asking us for our prediction on whom we believe will likely occupy the Oval Office for the next four (and possibly eight) years and the likely impact on the economy and stock market of such a victory. I am very conscious of the risks of being seen as favoring one political party over another by making such a prediction, so I will only suggest that it is shaping up to be a very close race between Donald Trump and Hillary Clinton, two candidates with very different visions for the country overall, with the typical battleground states likely determining the winner in November.

I can, however, provide some insights on the likely impact of the next President on the U.S. economy and stock market. In my view, the outcome of this presidential election, in addition to many of the concurrent congressional races, will have a large impact on taxes, health care, immigration policies and federal regulations for months and years to come. While this particular 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 making key investment strategy decisions. Hence, I 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 an 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%

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.

I will certainly be closely watching the political races as the calendar gets closer and closer to Election Day. It is important to note that while the recognition of historical market trends, such as the ones discussed in this article, can prove beneficial, I still contend that greater emphasis should be placed on accurately defining an investor's specific financial goals, income needs, investment time frame and tolerance for risk when designing and managing a custom tailored, asset allocation strategy that allows for an investment portfolio to perform in wide variety of different market environments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.