How Will the Election Impact the Stock Market?By: Ryan T. Fulmer
Monday, October 3, 2016
Whether on the evening news, workday commute, or your Facebook newsfeed, one central theme has been dominating the news--the 2016 Presidential Election.
Unlike the news outlets that ponder whether the Shark Tank star Mark Cuban will sit in the front row, I won’t push a political agenda on you (a deep breath and sigh of relief).
Instead, let’s focus on the historical trends of the stock market during the election season and how they might impact your portfolios over the next one to four years. Chances are you have heard that a Presidential Cycle exists in the stock market similar to the old saying “Sell in May and go away, and come back on St. Leger’s Day.”
Indeed a trend exists around the election cycle. The four-year cycle follows this pattern: Post-Election, Mid-Term, Pre-Election, Election year. According to Charles Schwab research, the average returns are the strongest in the Pre-Election phase (year 2015), with an average return of 16% per year. During this phase, politicians are preparing to launch new campaigns and tackle the previous administration’s lingering problems.
Mid-single-digit returns are typical in the Election and Post-Election years and are the worst two years in the Election cycle. During these years, newly-elected officials try to tackle the more difficult issues of their campaign.
Mid-Term returns are somewhere in between and have averaged around 7%. The Mid-Term election generally twists to the opposite party and helps to divide power in Washington.
Be careful of averages.
For instance, in Pre-Election years since 1935, the Dow Jones Industrial Average has been up 91% of the time, with an average return of 16.1%. And while the Post-Election year’s average return has been +5.6%, the data shows a wilder ride.
The returns are positive 52% of the time, but regardless of the direction, it is usually a double-digit move in prices. Adding to the statistical nightmare when there is no incumbent, the Post-Election year is usually negative.
While I’m unsure what direction the stock market might take after the election, it is important to remember that the averages are positive regardless of which party is President.
Globally since the Great Recession, governments have made few positive fiscal changes. Debt-to-GDP ratios have skyrocketed, and investors are starting to wonder what might happen if another recession occurs while interest rates globally are near or below 0%.
After reviewing the policies from Donald Trump and Hillary Clinton, it looks like both candidates are interested in massive infrastructure spending, which should help stimulate our economy. For instance, Hillary Clinton’s proposal would include international tax reform (i.e. repatriation), which would help fund a $250 billion infrastructure program over five years.
I’m quite eager to see economic growth accelerate towards 3%, as I believe it would increase the Federal Reserve’s flexibility with raising interest rates. Keep in mind, they once again were afraid to raise rates in September.
Once the election occurs, the new President will have to select a new Federal Reserve Chair as Janet Yellen’s term will expire in February 2018. I expect the Chair to be named in the middle of 2017. Chances are Clinton would nominate Janet Yellen again, and Trump is, well, a wildcard after all!
All kidding aside, some industry pundits believe the Republican Congress might sway Trump to nominate a Chair who believes in a more rule-based approach to monetary policy.
Despite the uncertainty that lies ahead, it is important to remember that corporate growth strategies, profits, and competitive niches don’t erode overnight. While the stock market fluctuates every day, the underlying fundamentals and intrinsic value of the business change much more gradually.
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits and has been ranked as one of the largest money managers in Northeast Ohio.
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