From 1980 to present day, the S&P 500 has generated an average annual return of 8.55%. In calculating this figure, I’ve used a November to November timeframe to establish a useful baseline for an election year comparison.
This establishes the baseline: the S&P 500 has returned about 8.5% per year since 1980.
So the question to test becomes: does the market perform significantly better or worse the year after an election?
Of course, presidents aren’t able to implement all of their plans in their first year in office. But since markets are driven by expectations of the future, the first year following an election provides a useful gauge of the market’s confidence in the president’s plans. That is, does the market care at all who the president is or what his plans are?
The answer: no… it doesn’t really care.
Here’s how I came to that conclusion…
To compare against the baseline market return of 8.5%, I ran a test that determined the market’s return following the presidential election years of 2008, 2004, 2000, 1996, 1992, 1988, 1984 and 1980. The rules were the same as the baseline test: buy the S&P 500 on the second week of November and sell one year later.
The average annual return following a presidential election came in at 8.28% per year. Statistically speaking, that’s no different than the baseline average return of 8.55%.
There’s proof-positive that presidents don’t drive the markets. That makes me wonder… why did I bother watching all of those debates!?
If you haven’t done so already read the Survive & Prosper issue on “What I Learned From Bill Clinton.”