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Investors Like Election Years, No Matter Who Wins

Matthew A. Winkler is a Bloomberg View columnist. He is the editor-in-chief emeritus of Bloomberg News.
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Whether you favor the Democrat or the Republican, you have to like the stock market when the U.S. elects its president.

For investors seeking a quick buck, a bet on the Republican pays off because the election-year gains tend to be greater when the party's candidate prevails in November. The buy-and-hold folks do better when the Democrat wins because of larger returns and smaller price fluctuations during the following three years. At least that's been the pattern throughout the past half century, according to data compiled by Bloomberg. 

The market for shares has no ideology and it's impossible to be sure why it's done well in recent election years. So here's a theory: It's an expression of confidence in the American political system, with investors trusting voters enough every four years to act on their expectation of a brighter future no matter who wins.

How good are presidential elections for stocks? During the 13 presidential election years since 1964, when Democratic President Lyndon B. Johnson was elected in a landslide, the Standard & Poor's 500 Index gained 11 times, or the equivalent of 5.5 winning years for each losing year.

Election Years: Winners Beat Losers, 5.5 to 1
Annual percentage change in the S&P 500 Index
 
Source: Standard & Poors

Many of these gains were substantial, including 13 percent with Johnson, 19.1 percent in 1976 when Jimmy Carter was elected, and almost 26 percent in 1980, when Ronald Reagan was sent to the White House. For the 39 years without the national electorate engaged, the S&P 500 advanced 27 times and declined 12 times, or the equivalent of little more than two years of gains for every losing year, according to data compiled by Bloomberg.

All Years: Winners Beat Losers, 2+ to 1
Annual percentage change in the S&P 500 Index
 
Source: Standard & Poors

From Richard Nixon to Carter to Reagan to George H.W. Bush to Bill Clinton, the stock market enjoyed an unbroken election-year winning streak as three Republicans and two Democrats were elected. Maybe that was just statistical coincidence, but it took exceptionally grim economic conditions to account for the only two election years with negative returns. These were 2000, when the dot.com bubble burst before the Supreme Court's confirmation of Republican George W. Bush's disputed election, and 2008, when Democrat Barack Obama triumphed during the worst recession since the Great Depression. In those years the S&P lost 10.1 percent and 38.5 percent, respectively. 

Shorter-term investors did better when Republicans won, while Democratic victories rewarded those with more patience. The average annual return was 8.8 percent for the S&P 500 in Republican years compared to the 5.3 percent in Democratic ones, according to Bloomberg data.

But over the next three years, the S&P rose faster with a Democrat in the White House, returning average yearly gains of 11.7 percent compared to 5.1 percent for Republican presidents. And while the market shows a bit more stability during the years when Republicans win elections, Democratic presidents preside over markets with slightly less tumult in the years after they take office.

Shareholders may benefit over the longer term from Democratic presidencies because of the party's traditional commitment to direct government spending programs that give industries a boost. Think of President Obama's initiative to rescue the auto industry from bankruptcy in 2009 and the Affordable Care Act, which proved a boon to health care companies. Republican presidents have been skeptical of large-scale spending programs, preferring indirect approaches like tax cutting to stimulate the economy. In recent years conservative Republicans have even opposed spending on traditionally noncontroversial projects like road and bridge building.

Partly because of these differences -- government securities are inherently defensive and risk-averse investments, especially when growth slows -- bondholders do better under Republicans. While the Treasury market rallied in each presidential election year since 1978, when such data became available, bondholders received superior returns under Republican presidents -- 8.7 percent versus 6.5 percent in each election year and 9.8 percent annually versus 4.9 percent in the three years following the election, according to Bloomberg data.

Whatever the parties' idiosyncrasies, the period following their conventions is mostly benign for shareholders, and investors can anticipate less turbulence in the stock market this month. While the S&P 500 declined an average 0.1 percent during the past 52 Augusts, it gained an average 1.4 percent during Augusts of the presidential election years. Price swings in the stock market are narrower than usual in election-year Augusts.

So what should investors make of 2016 with Democrat Hillary Clinton and Republican Donald Trump virtually tied in the polls?

If stock markets past are prologue, whoever wins will have inspired the most confidence that the U.S. is strengthening. Trump in his acceptance speech on July 21 described a nation besieged by violent crime and ruinous global trade. A week later, Clinton spoke against a backdrop of falling unemployment, rising home prices and a growing economy to predict that happier days will be here again. 

If Warren Buffett's investments are a proxy for what's next, his candidate has the advantage. During the four years since President Obama was re-elected, Buffett's Berkshire Hathaway doubled its holding of General Motors to 50 million shares, increased its Wal-Mart stake to 55.2 million from 47.5 million and its IBM shares to 81 million from 68 million. Earlier this year, he acquired 9.8 million Apple shares, according to Bloomberg data. Buffett is voting for Clinton.

Winkler: The Markets Like Presidential Elections

(With assistance from Shin Pei)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matthew Winkler at mwinkler@bloomberg.net

To contact the editor responsible for this story:
Jonathan Landman at jlandman4@bloomberg.net