Myth Busters: Stock Market Expectations in Presidential Election Years

By Pamela Kaval - July 18, 2012 | Tickers: KO, WFM | 0 Comments

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Here we are again in another U.S. Presidential election year.  And in every presidential election year, I hear two basic things: (1) it is an election year, so stocks will go up; and (2) Democrats are in, so stocks will go down (and the converse: Republicans are in, so stocks will go up).  Since I have never seen any real long term data to back up any of these statements, I decided to investigate it myself to determine if these assumptions were really true and whether we can decide what will happen in an election year, and hence, what to do in terms of strategies for buying and selling stock for the rest of this election year. 

Using historical data from the Dow Jones Industrial Average (DJIA), I discovered that if we average the earnings of election years for the 28 elections between 1900 and 2008, the DJIA went up an average of 7.44%.  However, since there are only 28 observations, I do not feel like that is enough information to draw any conclusions, even if it is a positive number.

I then decided to look at this from another perspective: years that there is an increase (a positive year) versus years that there is a decrease (a negative year). The DJIA went up 19 out of the 28 election years (or 68% of the time).  As most research analysts I know, including myself, prefer to see numbers like 95%, 90% and 85% before statements can be backed up as not false, I will say this one is false:

Myth 1:  It is an election year, so stocks will go up - NOT TRUE.

What about the second statement:   “Democrats are in, so stocks will go down (and the converse: Republicans are in, so stocks will go up)”?  Here, what I found is that the average DJIA change for Democrats being in office during the election year was a 4% increase; for Republicans it was a 10% increase.  This does show that Republicans have a higher average increase than Democrats, but both have a positive increase.

What about the perspective of positive and negative years?  Here, I find that of the 12 election years that Democrats were in office, they had a positive DJIA outcome 7 out of 12 times (or 58% of the time).  Republicans, on the other hand, were in office for 16 election years and had a positive outcome for 12 of the 16 years (or 75% of the time).  75% is good, but, as I stated before, it is not enough to prove something is not false.  As such, I believe the second myth is also false: 

Myth 2:  It is an election year and a Democrat is in office, so stocks will go down - NOT TRUE.

So what have we learned here?  We have learned that there is no strong pattern in election years for the stock market.  Therefore, the best advice I have for the rest of this election year, and all years to come, is to follow the Motley Fool '13 Steps to Investing Foolishly' and continue to invest in the long term in strong companies that you believe will be around for the long haul.  Personally, I enjoy investing in things that I know about, such as food, so I make sure that my portfolio contains strong food related companies, such as Whole Foods (NASDAQ: WFM) and Coca Cola (NYSE: KO).   

Whole Foods is a natural and organic food retailer that opened in 1980 with 1 store; they have since grown to over 300 stores. Along the way, they acquired many other companies, including Wild Oats Market, Wellspring Grocery and UK based Fresh and Wild, to name a few.  Their latest stakeholder report showed an increase in revenue of more than one billion USD over the previous year.  In addition, they were rated by Fortune magazine as #24 in their “100 Best Companies to Work for in America” list.  I believe that all of these aspects illustrate the merits of Whole Foods as a solid long term investment.

Coca Cola is the world’s leading soft drink company.  I know this from personal experience, as I have been able to get a coke everywhere I have been in my travels around the world.  They have continually done well in their 90+ years of existence.  In their July 17, 2012 second quarter earnings report, they reported strong growth of 4% globally for the quarter and 5% for the year; revenues and income grew; and company shareowners approved a 2 for 1 stock split (Coca Cola’s 11^th stock split).  These are all positive signs for Coca Cola as a long term investment. 

Overall, I recommend ignoring anything you hear about stocks in election years, as the evidence just really isn’t conclusive.  Instead, stick with the tried and true long term investing model; and if you are like me, invest in things you know.

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