A Fidelity study that took stock market performance trends since 1948 found some remarkable trends. Presidential election calendar years have historically experienced solid stock returns. Since 1948, election years presided over by a Democratic administration saw an average market return of 15.4%. When Republicans were in power, the average return was 11.4%. Performance in years of Republican and Democratic presidential electoral victories rated Republicans at 12.5% and Democrats at 14.0%. This presidential cycle is unique because of the sweeping victories for the Democrats in both the House and Senate. According to Ned Davis Research, between 1901 and 2006, the market has fared best when Democrats control Congress.
Now, although Obama had joked about being from Krypton at the 63rd Annual Alfred E. Smith Foundation Dinner in New York last month, he certainly is no Superman. Taking a closer look at the presidential cycle and stock market returns, we see a pattern emerge. The Stock Trader’s Almanac in 2004 eloquently stated, “Presidential elections every four years have a profound impact on the economy and the stock market. Wars, recessions and bear markets tend to start or occur in the first half of the term and bull markets, in the latter half.”
The Fool.com suggests that investors who plunk down their money at the beginning of a president’s third year in office would earn a market-beating annualized gain of 11.85%, versus just 1.75% for a similar investment made at the start of the term. This pattern may be typical of the last 15 presidential elections, but 2008 has shaped up to be unique in the complexities of problems facing our newest ruler, President-Elect Obama. It could be safely conjectured that the duration of the bear vs. bull market pattern might very well be weighted towards bear for far longer than just 2 years.
As an investment strategy, one should not hold back their willingness to invest in order to time the potential upswing of the market during Obama’s 3rd or 4th year in office. This tactic would keep you from potentially actualizing gains in sectors that might weather the economic downturn favorably, such as healthcare and energy. Also, you might miss the opportunities created by new policies by the new administration, such as sustainable, green technologies. So, continue to invest and take advantage of the bargain basement prices that the downturn offers. Do your research and believe in what you invest into, choose quality – and when the market recovers you may just see those high returns once again.
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