Nothing about this wild and crazy presidential campaign year is normal. So how will it affect the financial markets? Will the usual patterns hold, or is it all up in the air?
“Statistical data will tell us presidential election years, especially when the incumbent cannot or isn’t running for re-election, tend to have more trepidation and downside risk,” says Jim Barnash, a certified financial planner with Wealth Financial Group in Buffalo Grove, Illinois.
“Investors and Wall Street are uncertain about the future. … With (Donald) Trump and (Bernie) Sanders in this year’s race, the uncertainty has been ramped up.”
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A historical perspective. History reveals some patterns linked to presidential campaigns. The Dow Jones industrial average has returned an average of 10.1 percent in presidential election years from 1912 to 2012, about the same as returns in the average year, according to research by Wharton School finance professor Jeremy Siegel, author of the best seller “Stocks for the Long Run.”
But in open election years, when no incumbent is running, the Dow has returned just 2.1 percent. Clearly, investors worry when they don’t know how the government will guide economic and regulatory policy.
Experts are quick to add that the data is too skimpy to make anything certain, as there were only eight open elections in those 100 years. Results varied widely, from a 33 percent loss in 1920 to a 49 percent gain in 1928. And other events often overwhelmed any influence of presidential politics — a 31 percent loss in 2008 was clearly linked to the financial crisis, for instance. Also, the numbers vary a bit depending on what period is covered.
Each year of a presidential term has its own trend, says Michael Brady, president of Generosity Wealth Management in Boulder, Colorado. “Historically, the first year of a four-year term is the lowest average return, followed by the second year being slightly higher, with the third year much higher and the fourth year, the election year, the second-lowest after the first year,” he says.
[Read: How to Find a Financial Advisor.]
So according to that pattern, this year and next year would be comparatively weak. That doesn’t mean the markets would be down — just that they might not do as well as during the second and third years.
Brady also notes that since 1900, stocks have dropped by an average of 1.2 percent in the last year of an eight-year presidency, which is what we are in today. But 44 percent of the time, the eighth year of a presidency coincided with a positive year on Wall Street.
Hold on, things are getting bumpy. So what does all this data add up to? Generally, it supports the old adage that the markets don’t like it when the future is unusually murky.
If so, 2016 might be an especially nerve-wracking year. Though Trump is looking stronger by the week, it’s still unclear if the blustery businessman will have enough delegates to sew up the nomination in the first vote of the Republican National Convention.
Even if Trump becomes the Republican nominee, his lack of background in public office and changeable statements leave an unusually large amount of doubt about his economic and financial policies.
“Two of the remaining candidates, Trump and Sanders, promise significant shifts in those policies” from the Obama years, says Paolo Pasquariello, associate finance professor at the University of Michigan’s Ross School of Business. “Yet both of them have not issued detailed statements on many facets of their economic policies.”
[Read: 13 Tips for Saving and Investing While Owning a Business.]
Democrat frontrunner Hillary Clinton is more of a known quantity. National polls generally show Clinton likely at this point to beat Trump in November, which mitigates some of the uncertainty, Pasquariello says. “The ultimate outcome of the ongoing presidential cycle does not seem to be in significant doubt — a Clinton administration,” he says.
Pasquariello predicts a volatile market until Election Day, followed by “relative calm” in keeping with past patterns.
The bottom line for investors. Is the presidential campaign’s effect on the markets something to be taken seriously? Or is it just an entertaining sideshow?
“This is definitely something for investors to consider,” Barnash says. “When investors look at the economy in general, who will be the head of the world’s greatest economic power and what policies will they want to implement definitely causes … concern.”
Yet it’s not really sensible to assume that any given year, especially one as unusual as this, will be predictable. Not only is the presidential campaign “crazy,” says Alan Dole, a wealth manager at Equity Concepts in Richmond, Virginia, but other factors are unusual as well.
“We are at a point in history that we have never been at before,” he says. “So when you look at a historical chart of what’s happened in different presidencies, there’s never been a presidency where we’ve had $19 trillion in debt. There’s never been a presidency where there was this big a divide in the people earning (big) income and the people struggling. There’s never been a presidency where the world looks like it does right now.”
Presidential odds-making certainly matters to speculators focused on the markets’ short-term gyrations, and those players might bet that an unusually high level of election year uncertainty could make the rest of this year an especially steep roller coaster.
But ordinary investors — folks with long-term holdings for college and retirement — probably shouldn’t get too worked up about it, says Jim Kee, president and chief economist for South Texas Money Management in San Antonio.
“The markets price in what’s knowable,” he says. “So in order to be opportunistic you would have to, one, know in advance who will win, and, two, know how much of that is already priced into the market. There’s no evidence that anyone has that kind of knowledge.”
He recommends staying the course: “From an investing standpoint, there are nowhere near enough data points here to make decisions that deviate from your long-term investment plan.”
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Hillary Clinton vs. Donald Trump: Here’s How Wall Street Sees It originally appeared on usnews.com
