The ACM Journal 2016 Q1

We Shall Overcomb
“If voting made any difference they wouldn’t let us do it.” – Mark Twain

You may not have noticed, but it is an election year. A time when smart, experienced adults revert to adolescent-like behavior. The bickering, lying, and even physical altercations just during the primary season promise to make this election year one for the record books.

With the stock market down so much early this year, I received a number of phone calls and emails from clients who are worried about the impact of the election on investment returns. So, we did a little research.

What we found was that going back to 1927, the stock market generated positive returns in every election year except for four. Of those, only one year, 1932, was a total disaster. The stock market was down 47.5% that year. Of course, the Great Depression may have had more of an impact than the fact that it was an election year.

This means that 18% of the time, election-year stock returns were negative. That is the same percentage for the year after an election. For the second and third year after an election, the percentage of negative returns is much greater, at 41% and 30% respectively. So, statistically, and if past is prologue (it isn’t), we ought to have the best chances of positive returns in the stock market this year and next.

Finally, the stock market historically has enjoyed the strongest magnitude of returns during election years. The average return has been 15.7% during election years, which is quite a bit higher than returns in other years (see graph below).

So, while there may be many things to worry about this election cycle, stock market returns should not be one of them. Your sensitivities on tax policy, immigration, abortion, gay marriage, marijuana legalization, and corporate inversions may all suffer considerable injury, but you can rest easy knowing that your portfolio is statistically likely to go up for at least a couple years.

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