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Market Returns and Presidential Elections

Investments

It’s a Presidential election year.  What impact will that have on the markets, and in turn, on my investments?

Is this a question you have been asking yourself recently? If so, you’re not alone.  Many people, less than enthused by one or both of the Presidential candidates put forth by the two major parties, have started to voice concern about the future of the markets.

First, investment plans tailored for you, should be based largely on information gathered in your initial and ongoing meetings and correspondence with you. Your plan should be built to help you achieve your long-term goals. Yes, markets are volatile.  However, it’s also important to realize that triggering events don’t always move the markets in the way we would expect.

The assassination of President John F. Kennedy was the first Presidential event that popped into my mind when I was thinking about events that could affect the stock market. I decided to see what happened to the S&P 500 Index during that time period.  What I found was that while the index went down 2.81% the day of that tragic event, the next month saw the index jump 7.50%, led by a 3.98% jump during the first day the markets were open after the assassination.

By studying decades of financial data, we’ve learned that the markets are just simply unpredictable. Sure, there are a lot of people out there who make predictions, and we do hear of a few who make a couple right once in a while, but we never again hear of those who got it wrong.  There are so many variables and moving parts affecting the markets that it is virtually impossible to achieve long-term success in investing by reacting to every event that impacts the market.  Case in point:  I did a Google search for historical events that impacted the stock market.  Much to my surprise, the first article that popped up was “10 Biggest Financial-Market Events This WEEK” (I capitalized and bolded the word week to show my reaction to the word).  If there are ten big financial market events affecting the market every week, how could we ever react to and correctly guess what impact these events would have on the market?

In addition to being volatile, we also know that markets tend to be cyclical. If you look at market history, it seems to me that we are probably due for a market downturn during the next presidency, no matter who gets elected.  Regardless of who is leading our country, markets are cyclical, and they tend to loosely follow business cycles.  Since 1945, we have seen 11 business cycles (from trough to trough), according to the National Bureau of Economic Research (NBER).  During these cycles, the average number of months from trough to trough was 69.5 months.  The average of all cycles from 1854 to 2009 has been 56.2 months from trough to trough.  The Business Cycle Dating Committee of the NBER has determined that the last expansion began in June of 2009 (the bottom of the last trough).  Based on averages since 1945, we should have seen a trough in March or April of 2015.  The shortest cycle (looking back to 1854) from trough to trough was 28 months long, and the longest was 128 months long.  Using the longest cycle in history would project us at the bottom of the next trough in February of 2020—toward the end, but still during the next Presidential term.  Given that the stock market tends to be a leading indicator of the business cycle, a market downturn could very well precede the beginning of a business cycle contraction.

The good news is that every market downturn has been followed by a market recovery.  There is no reason to think that won’t be the case in the future.  After all, businesses are still producing goods and providing services, and trying to do so at a profit.  In addition, consider that the business cycle contractions (and related market downturns, or bear markets) have tended to be shorter in duration than the business cycle expansions (and related market upturns, or bull markets).  The longest business cycle contraction (from peak to trough) was from October 1873 to March of 1879 (65 months), and the next longest was from August 1929 to March 1933 (43 months)—the Great Depression.  It took the economy 36 months to climb out of the 1879 trough and up to the next peak in March of 1882, and it took the economy 50 months to climb out of the Great Depression and up to the next peak in May of 1937 (in contrast, the stock market peaked in early 1936).  All business cycle contractions (peak to trough) since the Great Depression have lasted less than 20 months–I’d like to think that means we’ve learned something about the cyclical nature of business cycles and the markets, but only time will tell.

I know that the newscasters and financial pundits can often make it sound like doom is upon us. Granted, market downturns and business cycle contractions aren’t fun to live through, but I encourage you to put more weight on historical data and sound financial planning than on the emotions that uncertainty and volatility can stir up.  After all, reaching any goal requires planning, practice, discipline, and keeping your eye on the prize.

- Andy Fitzpatrick, CPA