What Stocks Do After Elections

You're going to see more versions of "If X wins the election tomorrow, here's what stocks will do" over the next 24 hours than you can shake a stick at.

Try as hard as you can to ignore it all. History makes one thing clear: There is little correlation between elections and stock performance -- particularly in the short run.

Here's how the inflation-adjusted S&P 500 (INDEX: ^GSPC  ) has performed six months and one year after the last 17 presidents took office (keep in mind: Johnson and Ford became presidents without direct elections):

Election

S&P 500 Change 6 Months After Start of Term

S&P 500 Change 1 Year After Start of Term

1952: Eisenhower

(7.9%)

(3.8%)

1956: Eisenhower

(1.6%)

(12.7%)

1960: Kennedy

8.8%

14.9%

1963: Johnson

16.4%

16.1%

1964: Johnson

6.9%

11.6%

1968: Nixon

(11.3%)

(16.6%)

1972: Nixon

(17.2%)

(25.8%)

1974: Ford

0.3%

3.8%

1976: Carter

(2.8%)

(18.6%)

1980: Reagan

(7.8%)

(18.5%)

1984: Reagan

7.2%

16.8%

1988: G.H.W. Bush

13.2%

13.2%

1992: Clinton

2.8%

5.7%

1996: Clinton

19.7%

23.8%

2000: G.W. Bush

(13%)

(15.6%)

2004: G.W. Bush

0.6%

4.1%

2008: Obama

14.1%

26.5%

Source: Robert Shiller.

There is no discernible post-election pattern here; we've seen everything from big booms to sizable corrections. And there's little correlation between market performance six months or a year after presidents take office and performance over the course of their administrations. Stocks did poorly soon after president Ford took office, but they did remarkably well later in his term. The same goes for president Reagan.

As I wrote earlier this year, the vast majority of investment calls based on "Buy these stocks if X wins the election" turn out woefully wrong in hindsight. Some examples are astounding, like advice to buy small-cap stocks if Bill Clinton won in 1996 -- just as small caps were about to underperform large caps by half. Or calls to buy solar stocks and avoid Big Oil after president Obama was elected in 2008, just as companies like First Solar (Nasdaq: FSLR  ) were about to collapse and Big Oil giants like ExxonMobil (NYSE: XOM  ) were set up for big returns. It is extremely difficult to tie what the stock market will do to who wins a presidential election.

This is partly because what candidates campaign on is usually vastly different from what they do in office. Elections encourage a habit of overpromising, and opposing Congressional parties can constrain a president's ambitions. Whatever the reason, we have experienced every combination of Republican and Democrat president, bull market and bear market, that you can think of. People hate to think of the economy as that unpredictable, but it's the reality. The odds are quite good that the most important business stories of the next five or 10 years will have nothing to do with who wins the election tomorrow.

So keep in mind this week that:

  • You should want to own good businesses.
  • You should want to hold them for a long time.
  • You should want to buy them at great prices.
  • None of those three should be materially influenced by who wins the election.

In other words, buy companies -- not politics.


Read/Post Comments (37) | Recommend This Article (86)

Comments from our Foolish Readers

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  • Report this Comment On November 05, 2012, at 2:21 PM, superbinvesting wrote:

    It will be very interesting to see if history repeats itself and the S&P 500 generates a positive return 6 months - 1 year after the next president is elected. With the upcoming fiscal cliff and the ongoing turmoil in Europe coupled with the slowdown in China, if the S&P 500 manages to generate a positive return it will look very similar to that of 2004.

    www.ingeniousinvesting.com

  • Report this Comment On November 05, 2012, at 4:53 PM, TMFBane wrote:

    Wise advice, Morgan!

    Just for fun, here's a link to the 10 best stocks since the last presidential election:

    http://blogs.marketwatch.com/thetell/2012/11/05/10-best-stoc...

    Was really impressed with the quality of the businesses on this list (WFM, AAPL, CMG, etc).

  • Report this Comment On November 05, 2012, at 5:37 PM, Nvrweakly wrote:

    Please don't add to either the 1) politically editorial or 2) generally illiterate by using the phrase "Democrat president." You don't say "Republic president" because republic is a noun, not an adjective. Ditto for Democrat and Democratic.

    It's an article of faith for Rush Limbollix and all Republicans never to use the correct adjective "Democratic," but please, leave it out of the financial press.

  • Report this Comment On November 05, 2012, at 5:41 PM, PositiveMojo wrote:

    Morgan good advice.

  • Report this Comment On November 05, 2012, at 6:30 PM, djkumquat wrote:

    we will either end up with gridlock or a clean sweep by the GOP. either way, i wouldn't be surprised if stocks go down. gridlock increases worry about the fiscal cliff and getting anything done over the next two-four years. a clean GOP sweep looks like bad news for helicopter ben, whose policies have been inflating assets. keeping powder dry...

  • Report this Comment On November 05, 2012, at 6:56 PM, diegorgazzi wrote:

    I want to know what the stats are the NEXT day after elections.

  • Report this Comment On November 05, 2012, at 7:09 PM, spinindog wrote:

    There are always bigger stories than who is in office.

    For instance, the Information Technology Revolution kicked into high gear during the Clinton administration. He had nothing to do with the economic boom except find ways to use the surplus that landed in his lap.

    During the Bush adminstration, the policies of previous lawmakers that demanded banks loan money to people who had no business owning a home, created the housing bubble and our current economic crisis.

    I can think of very few instances of a president having any immediate impact on the economy, with the exception of investor confidence.

  • Report this Comment On November 05, 2012, at 7:09 PM, chris293 wrote:

    Right now we need to watch out for stock touts, not that advice that even free does not have to bad. But you have to do true research on anything. The idea of a free ride in life died with the fall communism in the former USSR and its' slow death in China hopefully soon.

  • Report this Comment On November 05, 2012, at 7:56 PM, pongdupont wrote:

    Actually, there is a very discernible pattern - the market is far more likely to be at both 6 and 12 months post election of a Democratic candidate.

  • Report this Comment On November 05, 2012, at 7:57 PM, pongdupont wrote:

    Actually, there is a very discernible pattern - the market is far more likely to be up at both 6 and 12 months post election of a Democratic candidate.

  • Report this Comment On November 05, 2012, at 8:43 PM, decebalvs wrote:

    Chaos is the order that we don't understand.

  • Report this Comment On November 05, 2012, at 9:10 PM, NickD wrote:

    So you mean Obama made stocks rise to most you don't say.

  • Report this Comment On November 05, 2012, at 11:31 PM, Chopkoski wrote:

    Thank God the stock market does not depend on who is president! Having whoever or whatever for president interfering in the market would be adding ridiculous to the sometimes very absurd.

  • Report this Comment On November 05, 2012, at 11:38 PM, kahunacfa wrote:

    Morgan, one HUGE MAJOR problem with your article. The market performance should be measured NOT at the start of the new Presidents term but rather from the time of the final vote count of the Presidential election. Once a new President is elected market participant know at least in very large part what new policies and Presidential initiatives will take place with the new administration.

    The stock market is a discounting mechanism. Once the election uncertainty has been removed, Republican or Democratic candidate, something is known about future policies and the direction of those policies that was not known before the election.

    The performance of the market should be measured from November -- NOT the January when the new President actually takes office.

    Kahuna, CFA

    Investment Professional

    1974 - Present

  • Report this Comment On November 06, 2012, at 2:14 AM, Kipmie wrote:

    I am surprised that The Fool has missed the very obvious pattern in these data: The direction of the market 6 months out is HIGHLY correlated to the year-out performance. Only in the case of Eisenhauer 1952 is the trend reversed. That is, if the market is up in 6 months, it will be up, often by more, in 12. Likewise, if it is down in 6 months, it will be down in 12, again often by more. Sometimes the change in 12 months is less, but not by much.

    I also agree that the interesting statistic is relative to the election, not inauguration. The immediate, post-election jump is also not to be ignored. Can you re-post with post-election, rather than post-inauguration statistics, and in addition with the jump from the day before the election to the day, week, and month after? A chart giving day, week, month, 6-month, and year after election, relative to pre-election, would do it.

    Thanks,

    --jh--

    kipmie - knowledge is power, math is easy

    Fool since 1997

  • Report this Comment On November 06, 2012, at 6:16 AM, gilsh wrote:

    The only thing that can be learned from predictions based on history, just like in predicting winners in elections -

    http://www.israelipolitics101.com/2012/11/united-states-elec... -

    is that these predictions do not work well under rigorous scrutiny. that is all.

    but can't the same be said upon any stock investments methodology ?

    after all, even the buffet principles of investment, which stand at the heart of the recommendations in this article, did not stand to scrutiny in the time-window of 1998-2008.

    bringing us back to an older principle: never keep money you may need in the next two years invested in the stock exchange market. regardless of who is president and what is the nature of the market.

  • Report this Comment On November 06, 2012, at 8:19 AM, RavenandSunny wrote:

    Would the higher percentage for Obama's term have anything to do with the Fed printing money that has no back up, thereby causing inflation?

  • Report this Comment On November 06, 2012, at 8:34 AM, TMFMorgan wrote:

    ^ The figures are inflation-adjusted, as noted. Also worth noting that the Fed has expanded the money supply under every president, not just the current one.

  • Report this Comment On November 06, 2012, at 1:16 PM, mdk0611 wrote:

    Perhaps "buy them at a great price" will happen after everybody who trades on "here's what stock's will do" completes their transactions.

  • Report this Comment On November 06, 2012, at 4:03 PM, EdmondHillary wrote:

    "There is no discernible post-election pattern here; we've seen everything from big booms to sizable corrections."

    Actually, there is, and if you Google "Harry Dent", and study his work, you will see it...

  • Report this Comment On November 07, 2012, at 9:34 AM, candyryan wrote:

    Post-Election Buys and Avoids

    Now that the election is over, and life goes on, institutional and retail investors must align or in some cases re-align their portfolios. After all, the expectation of certain policies will have an impact on both the stock market direction and specific sectors. Generally speaking, we believe that a deal of some sort will come on the fiscal cliff. However, we would avoid big cap dividend stocks as we are leaning toward the notion that part of the compromise will still include a hefty dividend tax increase.

    http://www.goldmanresearch.com/Daily-Blogs/post-election-buy...

  • Report this Comment On November 07, 2012, at 9:37 AM, candyryan wrote:

    Post-Election Buys and Avoids

    Now that the election is over, and life goes on, institutional and retail investors must align or in some cases re-align their portfolios.

    read more

    http://www.goldmanresearch.com/Daily-Blogs/post-election-buy...

  • Report this Comment On November 09, 2012, at 12:09 PM, jmi2012 wrote:

    interesting that it went down after presidential elections with only one Democrat - Jimmy Carter; Reagan & G. Bush split with their reelection; i don't think that Ford should count...

  • Report this Comment On November 09, 2012, at 12:11 PM, AAADFS wrote:

    Tell this to the coal companies, and see what they have to say.

  • Report this Comment On November 09, 2012, at 1:03 PM, larrrup wrote:

    So the point is vote for a Democrat based soiely on the preformance of the stock market? There is a lot more at stake here than that! This country could be energy independent if we unleashed the oil production sector in the US and let them frack for oil and gas everwhere. This would reduce our balance of trade deficit which could help save the country.

    Let's talk about the debt level near to Greece, which is a failed economy it just hasn't laid down and died yet.

    I know you don't have a lot of use for gold but I think anyone who doesn't have some in their portfolio better yet their safe is making a big mistake. I fear this country will turn into a socialist utopia like France. I really worry about my grandchildren.

  • Report this Comment On November 09, 2012, at 1:05 PM, Phooey7 wrote:

    No administration has damaged the whole economy like this one. There is no precedent of this size and proportion, and none has pumped more money = created more debt to buy votes, than this one.

    All bets to expect the market to "perform" in a similar way to prior events are foolish. No pun intended.

    Crying towels will not help; impeachment would be hard, but more honest and better for America.

    Too bad we have no Senate, just a rubber stamp.

    The economy will be in shambles in less than 2 years, and our military will be in disrepair.

  • Report this Comment On November 09, 2012, at 2:15 PM, DutchMark wrote:

    "This is partly because what candidates campaign on is usually vastly different from what they do in office."

    I know this is a popular opinion, but apparently not based on fact. I saw a study the other day that politicians very much (try to) do what they promised during the election. Sure, they don't always get what they want, but that's not the same thing as doing something "vastly different". Politics is messed up enough as it is, we don't need even more fact-free cynicism out there.

  • Report this Comment On November 09, 2012, at 2:19 PM, TMFMorgan wrote:

    ^ I'd love to see that paper if you have it.

  • Report this Comment On November 09, 2012, at 3:32 PM, PoorerThanU wrote:

    LOL Morgan, you used inauguration dates? That's just FOOLISH. (all caps!)

    You want a meaningful statistic of presidential election results? Tell me what the market has done in the days after an incumbent is re-elected. I *WISH* I knew that tidbit BEFORE Tuesday. I honestly thought the market would go up if Obama was re-elected...you know, removing an uncertainty and all that. History tells us a much different outcome.

    (HINT: Markets don't go UP when re-electing the incumbent...this one or the previous ones, R or D.) Again, I am talking about the days after election day not the months after.

  • Report this Comment On November 09, 2012, at 4:49 PM, SkepikI wrote:

    Hilarious. I will believe there is a correlation when somebody runs the statistical tests for randomness. Until then I believe the Morgan correlation, which is to say, NONE, no matter if the number is taken on Inauguration day, 6 months, 1 year, 2 years or on every full moon.

    You might as well analyze what happens to the markets on the day after, 6 months later, and one year after the mass suicide of Lemmings in the Arctic. I'd be more inclined to accept a correlation if you could find NO as in Zero days the market was up for the 3 years post election.

    What happens on one given day no matter when you "count" it as "data" is unimportant to me. And "asserted" or "inspected" cause and effect to one event, ie a presidential election has even less relevance...

  • Report this Comment On November 09, 2012, at 5:40 PM, whyaduck1128 wrote:

    "What Stocks Do After Elections"

    Correct answer--They fluctuate. Just like they do after any event or non-event.

    We, as Fools, should not care about any of this. Given the lack of a verifiable, statistically valid trend, all this talk is merely speculation.

    The Fool consistently urges us to buy good companies and hold them. So why should we care about the short term?

  • Report this Comment On November 09, 2012, at 8:06 PM, 4farve wrote:

    There is a very obvious pattern. In all cases the trend following each election activity at 6 mos continues at the 12 month mark. To me that is very interesting and useful

  • Report this Comment On November 09, 2012, at 8:07 PM, 4farve wrote:

    with the exception of the first election posted....

  • Report this Comment On November 10, 2012, at 4:19 AM, chris293 wrote:

    Con persons and hype cause a lot of the fear in various sections of the economy in the US and world-wide with all the new means of instant communication. The old saying, "Don't believe everything you see, hear, or read." applies today just as much as it did in the past before ballpoint pens when most if not all people were forced to write right handed with ink.

  • Report this Comment On January 08, 2013, at 7:42 PM, systemBuilder wrote:

    No pattern? What universe did you just teleport in from ??

    6-month 12-month

    1952: Eisenhower -7.90% -3.80%

    1956: Eisenhower -1.60% -12.70%

    1960: Kennedy 8.80% 14.90%

    1964: Johnson 6.90% 11.60%

    1968: Nixon -11.30% -16.60%

    1972: Nixon -17.20% -25.80%

    1976: Carter -2.80% -18.60%

    1980: Reagan -7.80% -18.50%

    1984: Reagan 7.20% 16.80%

    1988: G.H.W. Bush 13.20% 13.20%

    1992: Clinton 2.80% 5.70%

    1996: Clinton 19.70% 23.80%

    2000: G.W. Bush -13% -15.60%

    2004: G.W. Bush 0.60% 4.10%

    2008: Obama 14.10% 26.50%

    TOTAL RETURN 0.78% 0.33%

    VERY POOR TOTAL RETURNS AHEAD !!!

  • Report this Comment On January 08, 2013, at 7:48 PM, systemBuilder wrote:

    Also, -3.93% average performance after a republican is elected, 4.26% average performance after a democrat is elected !!!

  • Report this Comment On January 08, 2013, at 7:51 PM, systemBuilder wrote:

    Also, market is already up 3.99% since December 31st, so apparently Mr. Market knows this fact !!

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