How Stocks Tend to Perform During America’s Election Season

Subscribers to Chart of the Week received this commentary on Sunday, January 14.

The Dow Jones Industrial Average (DJI), Nasdaq Composite (IXIC), and S&P 500 Index (SPX) posted impressive yearly performances of 13.7%, 24.2%, and 43.4% respectively. However, look at the November-December gains from all three major indexes: 13.6%, 13.3%, and 16.2%. Especially for the Dow and SPX, a good chunk, if not all, in the Dow’s case, of 2023’s gains came in the final months of the year. The kick at the finish line is even more interesting considering the potential onslaught of volatility expected as we enter the quadrennial presidential election.

While Franklin D. Roosevelt saw the change move into action for his second term, in 1949 Harry S. Truman became the first president to have their first elected day in office during the month of January, after inauguration day was moved from the month of March. This gap between the election and inauguration was narrowed to avoid a "Lame Duck" Congress in 1933. And not to cause alarm or state the obvious, but somehow we are exactly 12 months from the next inauguration.

The U.S. is now entering its 19th presidential election cycle, and alongside our above history refresher, Schaeffer’s Senior Quantitative Analyst Rocky White decided to pull data since 1949, to see what history is telling us to expect for the potentially volatile year ahead. Unsurprisingly, we tend to see a performative shift on Wall Street during the turmoil that can become the election season.

Per White, the fourth year in an election cycle has a decent 7.28% average return with a percent positive of 83%, which is very good. However, there hasn’t been a lot of upside, with an average of about 12% pulling in positive, while all other cycle years have an average positive of about 19%. The second table below shows each cycle broken between the first and second half of the year. The second half has typically been better than the first.

Drilling down, if we are only looking at the fourth year for the first and second half of the yearly performance for the S&P 500, as mentioned above, it’s impressive. While the average return in the first half of the year is just under 3%, this positive outcome is seen more than 65% of the time, with the second part of the year enjoying an even more impressive 4.2% average win, eight out of 10 times.

It’s safe to say the days of a "typical" election year in terms of both market performance and political theatrics are over. It’s simply too profitable for news cycles to not stir up and amplify division. But as a contrarian investor that’s instructed to cut through the noise, these tables can serve as a loose guide to whether America’s election season can lead to outsized stock market gains. Because after all, is there anything more American than hedging your bets on both Wall Street and America’s future simultaneously?