Guest Column: Economy – not election – drives stock market

Tracking history

But before making adjustments based on who might occupy the Oval Office, it might be a good idea to take a look at how the stock market has performed historically following election years.

Starting with the 1864 election and leading up to the presidential election in 2000, information in Yale Hirsch’s Stock Trader’s Almanac indicates that:

• The stock market shows no pattern in post-election years. The post-election year from December to December has seen the market advance 17 times and decline 16 times.

• The market has not played favorites with political parties. If broken down by which party won the White House, a Republican victory produced a rising market in the calendar year following an election 10 times, and such a victory produced a lower market 10 times. Similarly, a win by the Democrats produced a higher market in the calendar year following the election seven times, and a lower market six times. For those interested in statistics, consider this: Hirsch’s almanac also shows that in the 15 elections between 1900 and 2000, the market rose 13 times when the incumbent party reclaimed the presidency. In the two years with declines, the market dropped just 0.5 percent and 2.3 percent, respectively, after an incumbent-party win.

When the incumbent party lost the presidential election, the market declined six out of nine times, and only one of those declines was not considered relatively minor.

As is shown by the historical data, presidential elections typically do not have a major effect on the stock market. History has shown us that the relation between the outcome of the election and the stock market’s performance is truly a minor connection, at best.

The economic connection

Once the lack of a connection is clear, some investors might wonder if there is a factor that correlates with the stock market’s performance. The answer to this question is yes: the economic cycle. Looking at the 11 post-election calendar years prior to 2000, there were six annual market gains and five annual market declines. Once again, nothing in these figures would indicate a clear connection between the stock market and the elections. But if the economy’s performance is compared to the stock market’s performance, one might find that an interesting relationship has developed through the years.

In those same 11 post-election calendar years, during the five in which the economy entered a recession, the market declined. In the six post-election years in which there was no recession, the market rose five times and declined only once. Of course, no single economic indicator always correlates with the stock market’s performance. But in the year after a presidential election, the stock market’s performance is usually influenced more by the economy than it is by the previous November election.

By keeping in mind a long-term investment strategy that fits individual objectives and lifestyles, and selecting quality investments to help reach financial goals, investors can rest easier and tune out some of the buzz around the 2008 presidential election.

Timothy M. Reese is managing director-investments with A.G. Edwards, a division of Wachovia Securities LLC in Springfield. Member SIPC. He may be reached at timothy.reese@wachoviasec.com.[[In-content Ad]]