Why the Presidential Election Will Lead to a Brighter Year
Ire and unease have gripped the nation.
Americans have been wrestling with anxiety and unrest related to the pandemic. And to throw kerosene on that dumpster fire, we have mounting anxiety over today’s U.S. presidential election…
At least one of those will soon be in the rearview mirror… hopefully.
Over the past month, I’ve covered the “October Effect” during election years in-depth and how the markets collapse in the month leading up to the election as uncertainty reaches a crescendo.
That’s exactly what we’ve watched play out this year…
The Dow tumbled 4.6% last month.
That’s the largest pullback we’ve seen in October during an election year since 2008. And it’s also the fifth consecutive October before a U.S. presidential election that the Dow has ended the month with a big drop.
That’s why I’ve been preaching for weeks that, despite everything 2020 is throwing at us, this move down is normal.
And that should provide a little cushion of comfort if nothing else does.
But now that the election is here, what’s next?
Well, the data is optimistic, no matter who wins the White House.
The U.S. Presidential Cycle
For investors feeling anxious about what will happen in the market over the next 12 months, there’s a trend that they can turn to for guidance: the U.S. presidential cycle.
I’ve successfully followed this trend in times of crisis and in times of plenty. And I’m always surprised by how accurate it is.
This is what I used to predict that in 2017, no matter who won, the S&P 500 would increase 19%… which it did.
It’s what I used to predict the “Great Correction of 2018” and what I used to predict at least a 17% return in 2019… both of which we got.
And it’s what I used to warn investors that 2020 was going to be a turbulent year for the markets… which it was in a variety of ways.
Now, I’ve been able to do that because I’ve created a modern version of the U.S. presidential cycle.
It’s a four-year cycle that has two monster years and two years of caution. Traditionally, the view posed by trend trading icons, like Yale Hirsch, is that the third year of a presidential term is the strongest, followed by the fourth, second and then first.
Well, I’ll show you why that’s wrong…
As we’ve seen over the last eight presidential terms, the Dow’s best years – by far – have been the first and third years of the cycle.
During the first year of a new term, the Dow averages a 15.7% return. And in the third year, the blue chip index’s average gain is even better at 16.7%.
The first years that underperformed this mark were 2001 and 2005. Third years that underperformed that average gain were 2007, 2011 and 2015.
But is one party in the White House better for the markets than the other?
The data here is also counterintuitive…
Blue vs. Red Market Returns
The threat occurs every election cycle: “If so-and-so wins, the stock market will crash!”
For the most part, that’s not true.
But I’ve watched plenty of investors liquidate their holdings or refuse to invest in the market because their party didn’t win the election. They claim it’s all going to come crumbling down any minute because their policies are destructive to investors.
As I’ve stated here numerous times throughout the years, “There will be down days, down weeks, down months and even down years. But the market ultimately moves in only one direction: up.”
Since 1952, the annualized return of the S&P 500 when a Democrat sits in the Oval Office is 10.6%. The annualized return for a Republican president is 4.8%.
Neither is negative.
And the variance is largely due to the last two Democratic presidents overseeing massive economic expansions that led to the stock market skyrocketing.
The two presidents who oversaw the largest stock market gains ever were Democrats – Bill Clinton and Barack Obama. The two presidents who saw the worst S&P 500 returns were Republicans – Richard Nixon and George W. Bush.
Prior to COVID-19, the biggest stressor for Americans was the 2020 election. And we’ve seen that stress continue to ramp up as the election has grown closer and the rhetoric has grown more divisive.
But history has shown us that regardless of who wins the White House, 2021 should be a strong year for the markets. The stock market largely heads higher during the first year of the cycle – even if there are bumps along the way.
Too many investors cause irreparable damage to their portfolios by fleeing to the sidelines when their party doesn’t win the election. This is one of the most destructive biases investors can practice.
As history has shown, the markets love certainty. And that’s what we get in the four-year presidential cycle.
Here’s to high returns,
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