92%+ Chance of an Increase in the Stock Market with Democrats in Office

By Pamela Kaval - August 2, 2012 | Tickers: DD, XOM, GE, PG, UTX | 0 Comments

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I recently did a blog on presidential election years and the stock market (Myth Busters:  Stock Markets in Presidential Election Years), but what I found was not exciting.  A brief summary of the data from 1900 to 2011 showed that the Dow Jones Industrial Average (DJIA) went up 68% of the time in an election year; that breaks down further into an increase of 75% of the time when Republicans were in office and 58% of the time when Democrats were in office.  Basically, the numbers showed no strong stock market patterns in election years.

But people don’t just talk about the election years with stock markets in relation to presidencies; they talk about all four of the years in a presidential cycle, with Year 4 being the election year.  Now I have to admit, the results for Years 1 and 2 of a presidential cycle are pretty similar to those of an election year.  For the same range, in Year 1, the DJIA went up 50% of the time; 62% when the president was a Democrat and 43% if they were Republican.  For Year 2, the DJIA went up 57% of the time; 62% for Democrats and 53% for Republicans. 

So the Election Year and Years 1 and 2 were uneventful.  The results for Year 3, however, really threw me off.  For Year 3, the DJIA went up 82% of the time (that is a pretty good result, even for an economic research analyst like me!).  For Republicans in Year 3, it went up 73% of the time, while for Democrats, the DJIA went up 92% of the time (Those odds are much better than the 50/50 result in Year 1).

In looking into this further, I found out that since 1943, or the past 70 years, the DJIA has gone up in every single 3^rd year of a presidential election cycle (and hence, 100% of the time for both Democrats and Republicans; and for those wondering, there were 9 Republicans and 9 Democrats, so no differences between parties)! 

Now I’m not going to bet my life on the DJIA going up in 2015, but history shows that there is a pretty good chance that it will! 

So what do we do with this information?  I will go ahead and assume you are someone that buys and holds your stocks.  With no other information, you might say you should hold off buying stocks until the end of 2014, before the stock market goes up in 2015.  Let’s see how that theory pans out when compared to buying this year. 

Let’s say you have $10,000 to invest (we’ll assume there will be no more than this) and you want to invest in 5 DJIA companies ($2,000 each).  I went ahead and selected the 5 DJIA companies that have been on the DJIA since before the 1940 continual increase: DuPont (NYSE: DD), ExxonMobil (NYSE: XOM), General Electric (NYSE: GE), Procter & Gamble (NYSE: PG) and United Technology Corporation (NYSE: UTX).  You want to invest for 20 years. 

Since I can’t predict the values of these stocks in the future, let’s pretend it is the past.  It is December 31, 1992; you want to cash out your stocks on December 30, 2011.  President-Elect Bill Clinton, a Democrat, just won the election and will start his first term next year.  Do you invest now or wait until the day before the beginning of his third year in office?  Let’s see.

For  simplicity’s sake, let’s make some assumptions: (1) no brokerage fee for buying and selling stock, (2) no dividends, and (3) no discounting for inflation necessary.   

If you bought your stocks now (well, December 31, 1992), held onto them and cashed them out on December 30, 2011 (there was no trading on the 31^st that year), your $10,000 would have become $54,243 (a 442% increase).  Considering that there were two recessions during that time period, that is pretty good.

If you waited to buy your stocks until December 30, 1994 (there was no trading on the 31^st that year either) and cashed out on December 30, 2011, your $10,000 would have become $45,843 (a 358% increase).  358% is good, but it’s not as good as 442%.

The only time it was better to wait was for ExxonMobil, but that difference was negligible (just $66).  In all other instances, it was more profitable to just buy now.  And remember, I assumed no dividends.  Since all of these stocks have dividends, then what you would have earned if you reinvested your dividends would have been significantly more!

What does this tell us about investing now or trying to time the market in relation to presidential cycles when we are taking on a buy and hold strategy?  “Buy and hold now” is a good strategy; it even gets you through recessions.  If you want to invest now, invest now.  Don’t try to “time the market,” as it will not necessarily make you any better off. 

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