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Focus Points

Presidential elections

Investors weigh in on election outcomes


Summary
There is no evidence of a presidential election cycle in financial market performance market returns
during election years have generally been on par with long-term averages.
Positive economic and market conditions can have an influence on election outcomes, especially for
incumbent political parties.
More independent voters and rising discontent has made the outcome of this years election more uncertain
than in previous years, increasing the potential for market volatility in the coming months.

Figure 1. Changes in the S&P 500


during presidential election years

Presidential elections are often seen as monumental


events. The possibility of a change in leadership
every four years brings the potential for changes in
regulations, policies or the direction of the economy.
For some, these changes are signs for hope and
progress. For others, they can create anxiety.

40%
Avg. annual return
1928-2012: 7.4%

30%
20%
10%

Its natural for the uncertainty around presidential


elections to affect other aspects of life, in particular
the financial markets. Any uncertainty can contribute
to higher market volatility, so many investors see the
onset of a presidential election as having an impact on
market conditions and the value of their investments.

0%
10%
20%
30%
40%
1928

There is no historical evidence that the presidential


election cycle influences the financial markets.
Annual stock market returns during election years
have been generally on par with average long-term
returns. Going back to 1928, the S&P 500 Index has
risen 7.0% during election years, compared to the
average annual return of 7.4% for the index during this
time. (See Figure 1 at right.) Moreover, the S&P 500
has posted positive gains during 76% of election years
dating back to 1946, according to S&P Capital IQ. For
all calendar years during this time, the S&P 500 has
risen 71% of the time. So it seems investors in the past
have shrugged off the uncertainty that had come with
a potential change in political power.

1936

1944

1952

1960

1968

1976

1984

1992 2000 2008

Source: Bloomberg.

If there is any connection between the election cycle


and stock market returns, it could potentially be made
by looking at margin of victory. Annual S&P 500
returns have been higher in election years when the
winning presidential candidate receives at least 20%
more of the popular vote. (See Figure 2 on next page.)
The strong performance of stocks during these years
likely reflects a preference for greater certainty around
the election outcome, rather than an endorsement of a
particular candidate.

Figure 2. Yearly changes in the S&P 500 by


margin of victory in the presidential election

In the investment markets, rising equity values have also


helped incumbent parties remain in the Oval Office.
Much of the influence stock prices have had on previous
election outcomes occurred in the three months
just before Election Day. In all but three presidential
elections since 1928, the incumbent party has won the
White House when the S&P 500 is up for the three
months prior to the election and lost when the market
has been down during this period. (See Figure 4 below.)

20%
18%
16%
14%
12%
10%
8%
6%

Figure 4. Stock market performance three months


before the presidential election has been a reliable
indicator of results for the incumbent party

4%
2%
0%

<5%

510%

1020%

Positive return/incumbent party wins

>20%

Margin of popular vote victory

Source: Bloomberg.

Negative return/incumbent party loses


Exception to this trend

Incumbent parties benefit from good economic and


market conditions. While the election cycle doesnt
seem to have an influence on the market, the opposite
is often truefavorable market performance and good
economic conditions in particular have led to incumbent
political parties holding onto the White House. Neither
Democrats nor Republicans have advantages during
good times, which have helped both parties maintain
executive-branch power in the past.

Year

S&P 500 price return


3 months prior
to election

Election result for the


incumbent party

1928

14.9%

Won

1932

-2.6%

Lost

1936

7.9%

Won

1940

8.6%

Won

1944

2.3%

Won

1948

5.4%

Won

1952

-3.3%

Lost

1956

-2.6%

Won

1960

-0.7%

Lost

1964

2.6%

Won

1968

6.5%

Lost

1972

6.9%

Won

1976

-0.1%

Lost

1980

6.7%

Lost

1984

4.8%

Won

70%

1988

1.9%

Won

60%

1992

-1.2%

Lost

1996

8.2%

Won

2000

-3.2%

Lost

20%

2004

2.2%

Won

10%

2008

-19.5%

Lost

2012

2.5%

Won

Incumbent parties have won presidential elections more


often when employment is strong and the economy is
growing. In fact, the incumbent party has held on to
the White House in 70% of elections that have occurred
during economic expansions dating back to 1856. (See
Figure 3 below.) When the economy is strong and
people are working, voters are more encouraged to
keep momentum going in their favor. Its more about
riding the wave rather than rocking the boat.
Figure 3. Incumbent party winning percentage in
presidential elections by stage of business cycle
100%
90%

Expansions
Recessions

80%

50%
40%
30%

0%

First third

Middle third

Final third

Sources: Bloomberg, Federal Election Commission.

Source for data: Strategas (April 2016).

Figure 5. U.S. party identification,


yearly averages, 19882015

Voter animosity toward incumbent politicians makes


sense during tough economic times. People become
more nervous and uncertain about the future when
the economy contracts or their job prospects appear
cloudy. Theyre also more inclined to look beyond
their self-interests and see current problems as more
representative of the national mood as a whole.

% Democrat

% Independent

% Republican

45%
42%
40%

35%

The potential for market volatility is higher this election


year. Historically, stocks have turned weak in the months
just before Election Day. According to Strategas,
S&P 500 returns for the three months prior to
presidential elections have been 1% lower on average
than in all other months during the year.

29%

30%

26%

25%

20%
'88

But September and October have traditionally been


soft for stocks. In fact, performance in these months has
been worse during nonelection years. Since 1980, the
S&P 500 has returned 0.8% on average for the months
of September and October (excluding the outlier of
2008 when at the peak of financial crisis the S&P 500
declined 24.5% during these two months.) In just the
election years since 1980, the S&P 500 has returned
1.3% on average during September and October (also
excluding 2008.)

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

'14

Source: Gallup.

Also, the rise in discontent toward established political


partiesevident in the popularity of Donald Trump
among Republicans and Bernie Sanders among
Democrats this election seasonshould also be noted.
The strength of these non-establishment candidates
has the potential to disrupt the traditional process of
campaigning and electing presidents. Any disruption
could cause tremors in the financial markets, as
investors grapple with the possibility for an
anti-establishment candidate winning the presidency.

There are reasons for concern that market performance


for the months leading up to the 2016 presidential
election may break from these historical trends. Among
the causes for concern is the increase in independent
voters and widening gap between them and registered
Democrats and Republicans. Independents have been
increasing as a portion of the electorate since 2004,
while affiliation to either of the two major parties has
either held steady or declined since 1988. (See Figure
5 at right.) A higher share of independent voters in the
electorate adds to the potential uncertainty around this
election because no one can forecast which way they
will lean.

Benjamin Graham famously said, In the short run,


the stock market is a voting machine but in the long
run, it is a weighing machine. Election years amplify
the sentiment behind Grahams idea. Stock market
performance in the few months leading up to this years
election may reflect the anxieties of investors about
near-term changes to the political environment. But
beyond this short-term uncertainty, the long-term view
of stock investors is likely to remain focused on the
potential for opportunity and growth.

Key takeaways
For all of the uncertainty around the upcoming presidential election, remember that market performance
for election years has been generally on par with historical calendar year returns.
Be prepared for a potential increase in market volatility as the election nears and stay disciplined
with your investment plan.
Tune out the noise from the media around the election and keep your investment focus on your
long-term objectives.

IMPORTANT DISCLOSURE
This publication is for informational purposes only, and is not intended and should not be relied upon as an offer or
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Except where otherwise indicated, the views and opinions expressed are those of Nationwide as of the date noted, are subject
to change at any time, and may not come to pass.
Market index performance is provided by a third-party source Nationwide deems to be reliable. Indexes are unmanaged and
have been provided for comparison purposes only. No fees or expenses have been reflected. Individuals cannot invest directly
in an index.
S&P 500 Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in
leading industries; gives a broad look at the U.S. equities market and those companies stock price performance.
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