What to Make of the Markets During an Election Year

Taking a Look into Patterns Created During Election Years Answers Some Questions, But Raises Others.

The question about presidential elections and their impact on the markets is one we hear a lot, especially every 4 years! We, along with numerous others, have researched this topic extensively and as you would expect, the results are conflicting with no clear cut answer. Just when a particular theory or pattern seems to be dominant, it stops working. However, there are some statistics that seem to attract attention (see sidebar).

Hail to the Stocks

The first year and second year of a president’s term tend to be the weakest. The third year is the strongest with the final year doing relatively well.

Theories abound about why market patterns do or do not exist, most of which are related to the president’s or candidate’s focus on the economy. Unfortunately, from a statistical standpoint it’s all irrelevant. There are no statistically significant patterns associated with presidential elections, only generalizations that may not hold from cycle to cycle, party to party, or president to president. Rigorous scientific analysis that we might use in other disciplines is just not applicable. It is politics, after all.

Recently, we’ve been getting specific questions about Donald Trump, and what impact his election might have on the economy. The answer is the same. The market is a reflection of what people think will happen in the short- and long-term. Trump could be wildly positive for the economy or wildly destructive, but at this point, the markets are not showing any significant reaction one way or the other.

The truth is, only a few large government programs or bold policies have an immediate or outsize effect on the US economy in a meaningful way. The smaller ones do have a cumulative effect as well, but small or large, it often takes years before their true impact is known and many times they can have positive effects before negative effects take over. And, by the time the effects of these programs and policies are recognized, the politicians behind them are long gone and often forgotten.

To further confuse the matter, media outlets and political parties obscure the truth during a president’s watch, often blaming the other side for negative events and outcomes. This can affect the markets if investors are easily swayed by partisan rhetoric. While presidents do have some impact, there is a huge element of luck involved regarding the state of the economy while any particular individual is in office.

It is important to remember that short-term changes in global markets are a reflection of underlying news and events, and how they are interpreted by market participants. Long term, the impact of a president’s policies and how they influence the economy are almost impossible to separate from the multitude of other forces that shape corporate profits and thus investment returns.

Our investment philosophy is designed to prepare our clients for a wide variety of economic situations, market conditions…and presidents.

The post What to Make of the Markets During an Election Year appeared first on BlueSky Wealth Advisors.

About the author

David Blain

David is president and chief executive officer at BlueSky Wealth Advisors, a fee-only, independent Registered Investment Advisor (RIA) he founded in 1999. David is primarily responsible for defining the overall firm policies, strategy and goals. He also formulates advanced financial planning and complex tax strategies for clients, and is responsible for setting the firm wide investment strategy.

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