One of the most popular questions during client reviews this year is “How will the election affect the market?” One way to answer this question is with a crystal ball, or possibly a dartboard. Although there is plenty of available data about market returns during previous election seasons, there is simply no guarantee that this year will follow the same patterns. The only guarantee is that you will be tired of hearing about this election by the time November 8th rolls around (if you aren’t already).
Here are 3 ways an election impacts the market:
Market Gains More with Democrat vs. Republican Control
There’s an old assumption that Republican control leads to higher gains than a Democratic administration. However, historical numbers show it to be the opposite. During a Republican administration the Dow has shown an average of a 6% gain. Democratic administration gains have averaged 9%. (source)
Lower Gains in Election Years
Looking at historical numbers shows a trend surrounding election cycles. Historically, election years show 4% lower average gains than the year prior to an election year. On average, in the year prior to an election year the Dow sees gains of 10.4%, whereas election year gains have been closer to 6%. Remember, historical performance is not indicative of future returns. Given that the Dow ended 2015 with a gain of 0.14%, it is hard to predict what will happen for the rest of 2016. (source)
Increase in Market Volatility
During election years without a clear winner the market usually shows an increase in volatility. Investors often lose trust in a market when they are unsure of what economic policy will be in place after the election. Don’t be surprised to see a lot of fluctuation for the rest of 2016. (source)
The 2016 election has already proven to be unique and it will likely continue to create change in our democratic system. And remember, history shows, if there are losses during election season, the market will usually recover after a new president settles in.
One surprise we have seen this year; the U.S. market hasn’t followed the current outlook for the economy in that the economy has been and is projected to be somewhat sluggish, and the markets are currently trending nicely in positive territory. As the market tends to be a leading indicator, perhaps this bodes for better than expected economic performance in the near future.