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How have presidential elections historically affected the market? Do things seem on par this time around?


Certain patterns related to elections and stock market movements have emerged over the decades, although it would be intellectually risky to conclude that elections “affect” the market. That implies that particular election outcomes cause stocks to move in certain ways. Often when something is thought to influence something else, it turns out that some third factor is responsible for both. That caveat out of the way, history suggests that if well established patterns hold true this time around, investors could have some rocky months ahead of them.
Returns in the market during the first year of a presidential administration are often weaker than in other years. A plausible explanation is that presidents and Congress prefer to get bad news – tax increases, spending cuts and other policies that could slow economic growth but accomplish longer-term benefits like quelling inflation or reducing deficits – out of the way early in an administration. Another market pattern related to presidential elections is that stocks tend to do better after an incumbent loses. Perhaps the hope of a course change in Washington, the same phenomenon that leads to the incumbent being booted out in the first place, gives the market a lift.
The reelection of President Obama and the scheduled tax increases and spending cuts associated with the so-called fiscal cliff suggest that the two patterns could play out again. It’s too early to tell, of course, but the fact that stocks suffered some of their worst declines of the year in the days after the election certainly is not an auspicious development.
-Conrad de Aenlle