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Stock markets and election years

Presidential election years are traditionally good years for the stock market according to the Stock Traders Almanac. This is partly explained by incumbent administrations shamelessly attempting to massage the economy so voters will keep them in power.

Some cold, hard facts to prove economic manipulation in presidential years appeared in a book by Edward R. Tufte called “Political Control of the Economy.” In this book he stated, “Stimulative fiscal measures designed to increase per capita income to provide a sense of well-being to the voting public included: Increases in federal budget deficits, government spending, Social Security benefits, and interest rate reductions on government loans.”

Since 1952, beginning with the Eisenhower-Stevenson election, 12 out of the past 16 presidential election years were positive for the stock market as measured by the Dow Jones. Or, another way to say it: 75 percent of the time, the stock market has made money since 1952 in a presidential election year.

If you look at just the last seven months of a presidential election year, the percent goes even higher, where we see gains in the market in 14 of the last 16 presidential election years. Another way to think about this: Almost 88 percent of the time in the last seven months of an election year, since 1952, the market has made money.

It seems like the closer you get to the election, the more the pressure mounts for the politicians to keep the economy chugging along.

Now the not so good news.

Prior to President Barack Obama, there have been six previous presidents that served an eighth year in office since 1901. Presidents Woodrow Wilson in 1920, Franklin Roosevelt in 1940, Dwight Eisenhower in 1960, Ronald Reagan in 1988, Bill Clinton in 2000, and George W. Bush in 2008. Keep in mind, eighth years are always presidential election years.

Eighth years of presidential terms go against the tendency for the markets to be positive and represent some of the worst market returns. In eighth years, the Dow Jones Industrial Average and the S&P 500 have suffered average declines of negative 13.9 and negative 10.9, respectively. Out of these six eighth-year presidential election years, only 1988 was positive under Reagan. If you look at this as a percent, that would mean 83 percent of the time, when it’s the eighth year for a president to be in office, the market has lost money.  

Now here we are for the seventh time since 1901 in President Obama’s eighth year of his presidential term and an election year.

Obviously, we don’t know yet if the stock market will lose money or not for 2016, but in 5 out of the last 6 eighth-year presidential terms in an election year, this has been the case.

The better part of wisdom may be to take heed to Bette Davis’ famous line from movie classic All About Eve: “Fasten your seatbelts, it’s going to be a bumpy night.”

• Mike Piershale, ChFC® is president of Piershale Financial Group. If you have financial questions on this column, contact us at Piershale Financial Group, Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You may also email Mike@PiershaleFinancial.com

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