This is an election year, and according to “common knowledge”, it means good news for the financial markets. It is even reported as fact in many interviews and financial columns.
And it makes pretty good sense. After all, the four-year presidential cycle has a fairly consistent pattern of the market experiencing most of its serious corrections in the first two years of a presidential term, and most often making a substantial recovery in the last two years.
Of course, the pattern was interrupted when the financial crisis hit in 2007 and 2008, the last two years of the Bush presidency. But the circumstances were somewhat unusual, and the few times over the past 100 years that the cycle did not hold true did not affect the long-term percentage of the cycle.
It also makes sense that election years would be positive, as the incumbent administration pulls out all the stops to make sure the economy and stock market are positive when re-election time arrives.
Unfortunately, the “common knowledge” is just not true. In looking back over all the election years since 1920, here is what actually happened. Of the 23 election years, 15 were positive, or 66.7%. However, over those 91 years, 62 were positive anyway, or 68%. So whether it was an election year or not, had no effect on market performance.
How about Democrats vs. Republicans? Of the 23 election years, the market was up 63.3% when a Democrat was in office and 66.7% when it was a Republican. In fact, during that time, eight presidents served two terms, (FDR served three), and only two had positive returns in both of their election years. The other six had one election year that was positive, and one that was negative.
So it seems that investors may not be able to rely on an election year “indicator” to guide their investing decisions this year. But if you are interested, I will be glad to meet with you to discuss some other strategies that may be helpful. Please feel free to call or email me.
Have a great 2012!
Ken Kendall is the owner of Kendall Financial LLC, a Flower Mound-based Financial Planner. Contact Ken at 972-874-8757 or [email protected] .