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Investing in Election Seasons: Lessons From History About Investing Around Election Years

Oct. 31, 2012
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Elections cost a pretty penny to the U.S. government to run, but they are a necessary spending requirement for well functioning democracy. On the plus side, investors should note that elections are said to provide a big boost to the stock market.  Is this true, and how does it work?

What Is The 4-Year Cycle Strategy: Can You Profit?

In fact, the US presidential elections are said to be among the best times to capitalize for stock market investors – there is even an investor strategy that represents this called the 4-Year Cycle Strategy. In theory, investors should take advantage of the structural cycle that the US elections present by buying during the two years prior to the elections and then selling in the two years into the new term. US equities tend to adjust to the news of the elections and appreciate going forward.

Furthermore, the election itself coincides with the beginning of the best period for stock market investors. There is a Wall Street adage that goes “Sell in May, and then walk away” which speaks to the stock market rally from November to April.

Tech favorites such as Google (GOOG), International Business Machines Corp (IBM) and Microsoft (MSFT) have had disappointing earnings reports. Nonetheless, now may be the time to consider adding these stocks to your portfolio to benefit the greatest from the 4-Year Cycle Strategy (4-YCS).

Despite Market Uncertainty, History is a Hopeful Indicator

The presidential race has been a fairly close one, which has caused a lot of uncertainty in the stock market recently.  When it is tough to predict the future, investors look for past data to help them; the present scenario may well work out perfectly for investors in the stock market. Either in the case of a Democrat being re-elected or being replaced by a Republican in the White House, history says we will likely see the stock market rise – according to a fund manager who has studied market trends since 1926.  Historical averages when a Republican is inaugurated say the S&P 500 index could actually go up as much as 18.8% as opposed to an average historical 14.5% rise should a Democrat be re-elected.

However, the global economic outlook is still bleak, so the elections may actually not make much of a difference.

Democrats Have Seen Stronger Stock Markets

This is a nonpartisan article, but data indicates that investors will be better off long-term if President Obama ends up back in office. The simple reason: historically the stock market has done much better when a Democrat is in the White House. Going as far back as 1965, the average annual compounded S&P 500 gain was 10.9% during Democrat presidential terms. Republican terms fell short with only a 7.3 percent gain. At the same time, there has been a lot of volatility during these presidential terms that makes it difficult to determine stock market trajectory.  Overall, due to recovery from the recession, the stock market has enjoyed a superior performance not seen since World War II.

Elections directly affect individual stocks and industries: energy, defense, healthcare, and banking

The broader market will not be the only thing that is affected by these elections. We’re talking not only about two different presidential visions, but also policies that can sometimes be polar opposites.

For example: take the case of big oil – energy stocks will react differently depending on who wins the election.  President Obama and Mitt Romney have openly disagreed on the subject of energy independence since day one. On the one hand, we have Obama’s target of “One Million Electric Vehicles by 2015”. On the other hand, Mitt Romney is focused on making North America energy independent as soon as possible and won’t entertain the idea of a push to go electric.  Moreover, Romney is in favor of “Drill, baby, drill”, whereas Obama is firmly entrenched in his goal of developing clean energy sources. The possible dramatic changes in regulations as a result of the elections on November 4 will see the fortunes of big oil stocks fluctuating.

The other market sectors that will be very dynamic after Election Day will be defense, healthcare and banking. The Democrat incumbent and the Republican candidate have very divergent approaches to dealing with the problems in these sectors.

Investors should play election economics wisely

Most investors will agree that there is seasonality in the stock market. The US presidential elections will have a major affect on the stock market as they have done in the past. The best game plan for stock market investors, as always, is to pick stocks or funds with good fundamentals.  Additionally, investors can opt for a passive-index tracking fund to profit from this opportune moment.