An overview of the historical stock market performance in election years
Over the years one of the most consistent patterns in the stock market is that it has been strong in presidential election years. This pattern is so pronounced that almost all experienced investors are aware of it. This can mean good news since being able to recognize patterns is one of the keys to making money in the stock market. There are of course no guarantees however.
Most investors are well aware that election years are good for the stock market this is one of the pieces of accepted wisdom that most people base their trading decisions on. The obvious reason that this is accepted wisdom is that there are facts to back it up. Since the 1928 election on the market has been up in all but three years. This shows a pretty clear trend especially when you consider that the three years when the market was down there were other major events going on that had an impact.
The first time that the market was down in a presidential election year was in 1940, this was early in World War Two at a time when it was not at all clear who the winner would be. The market was then up every election year until 2000 when it was down because the tech bubble burst. It was then down again in 2008, this time significantly because the global financial crisis occurred in that year and it had a huge impact on the stock market.
Since investors usually look for patterns when they are investing it makes sense to use the historical stock market performance in election years as a guide. However there is clearly a need to be careful here. While it has been true in the past it does not necessarily mean that it will be in the future. In fact two of the last three election years the market has been down. Given that it was only down in one of the previous eighteen election years this could be an indicator that the pattern is starting to change. Or it could just be a sign that other events happened to occur during the election year that had a bigger impact.
The obvious question has to be can you use the past performance of the stock market in election years as a guide for making investments? In general you can but you do have to look at the big picture. There is clearly a trend towards a strong market in election years but it is not strong enough that it can overcome other events that are going on. The feeling for 2012 is that the market should be fairly strong, mainly because it has been weak for a few years now. It is poised to go up anyway so the election should help with that.