The Impact of Election Cycles on the Stock Market
Introduction
The relationship between election cycles and the stock market is a complex one. On the one hand, some investors believe that the market tends to perform better in years when the incumbent party wins. On the other hand, there is also evidence to suggest that the market can do well in years when there is a change in power.
Historical Performance
Historically, the stock market has performed well in the years following presidential elections. According to a study by the Stock Trader’s Almanac, the S&P 500 has gained an average of 10.7% in the 12 months following a presidential election. This is compared to an average gain of 7.6% in non-election years.
However, it is important to note that there is a great deal of variability in the market’s performance during election years. For example, the S&P 500 declined by 2.8% in the 12 months following the 2016 presidential election. This was the first time the market had declined in the 12 months following a presidential election since 1940.
Factors that Affect Market Performance
There are a number of factors that can affect the stock market’s performance during election years. These include:
- The strength of the economy
- The policies of the incumbent party
- The perceived policies of the challenger
- The level of uncertainty in the market
In general, the market tends to perform better when the economy is strong and when there is a high level of certainty in the market. This is because investors are more likely to be bullish on stocks when they believe that the economy is going to do well and that there is not going to be a major change in the political landscape.
Conclusion
The relationship between election cycles and the stock market is a complex one. There is no clear-cut answer to the question of whether the market performs better in years when the incumbent party wins or when there is a change in power. However, by understanding the factors that can affect market performance, investors can make more informed decisions about how to invest during election years.
