Presidential Terms: What does it matter to the economy?
It’s election day! Last week we gave you our take on the economic impact of midterm elections.
Now let’s talk about the effects of the presidential cycle.
See below for more…
Elections and the markets
Investors want to know what the midterm election will do to the markets. Historical data tells us that midterm election years are historically poor performing years in the stock markets.
Let’s step back and review the presidential cycle. Here’s what we found from analyzing 142 years of data:
- worst performing: year two
- average return of 2.7 percent
- best performing: year three
- equity markets gain on average 12.3 percent
One possible reason for the poor performance in the second year of the presidential cycle (which is also the midterm election year) could be that policy makers remove stimulus‡ after a presidential election, leaving the worst of the restrictive policy in year two of the presidential term.
Does party matter?
I hear many complaints about a Democrat in the White House being bad for business. Of course, everyone has a right to share opinions, but I’ll stick to fact-based data. I make the assumption that stock market returns are a proxy for business conditions. Going back to 1901, using the Dow Jones Industrial Average as a barometer, the best-performing markets have occurred with a democratic president. Further, the average return under a democratic president is 7.9 percent versus 3 percent with a republican president.
What if we are correct and the Republicans control Congress with President Obama in the White House? What can we expect from the equity markets? Historically that separation of control produces the best returns in the Dow. The average return in that scenario has been 9.8 percent. The worst returns – 1.7 percent – have been seen when the Republicans are in total control of Washington.
Perhaps our founding fathers structured it that way, to ensure no single party would have total control, at least not for long. Perhaps the financial markets don’t like abrupt changes and uncertainty. Gridlock ensures nothing will get done quickly and any policy tweaks will be relatively small.
We cannot disagree with data, but keep in mind that elections do matter on many fronts. So find a way to tolerate all those campaign ads, and go out and exercise your constitutional right to vote. If there’s any silver lining to having your political party in control of one side and your opposing party the other, remember it may be a good thing for the financial markets.
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K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.