2012 Presidential Election Year: Friend or Foe for your Portfolio?

Predicting the performance of the stock market, especially as of late, has been a near impossible task. One day, stocks are soaring, the next they’re plummeting. You can forgive investors for feeling dizzy as 2012 rolls in.

But 2012 is also a presidential election year, and so inevitably the experts are asking “Do election politics play a role in whether stocks rise or fall?”

Marshall Nickles, writing for Pepperdine University’s Graziado Business Review, takes a close look at this question, analyzing the performance of the Standard & Poor’s 500 Index from 1942 through 2002.

Nickles found that, generally, the stock market goes through a full cycle of ups and downs every four years. During these periods, stock market low points tend to occur close to mid-term Congressional elections, while stock market high points usually hit closer to the presidential election.

This would seem to bode well for the stock market’s performance in 2012. After all, this year will see a presidential election. Historically, stocks should rise.

Unfortunately, that hasn’t been the case lately.

Writing for Kiplinger, columnist Steven Goldberg notes that new presidents tend to make difficult economic decisions during the first two years of their presidencies. This often leads to a stock market that falls in value during this time.

As presidents start to look toward re-election, starting in the third year of their terms, they often resort to doing whatever they can to boost the country’s economy, Goldberg writes. Consider it an effort on the part of presidents to retain their jobs or to help their political parties maintain power. When this happens, stocks, not surprisingly, go up.

Goldberg cites some interesting numbers to back this up: since 1940, the Standard & Poor’s 500 Index returned on average a cumulative 9.3% during the first two years of a president’s term. In the second two years, the index boasted on average a far healthier cumulative return of 25%.

This pattern, though, has not been consistent of late. The term of George W. Bush saw the stock market fall 37% in 2008, the last year of his presidency. This came after the market actually rose in value during the first two years after his 2004 re-election.

Pres. Barack Obama has bucked the trend, too. In 2009, the first year of Obama’s term, the stock market rose 26%. In the second year of his term, it rose 6.2%. In 2011, though, the performance of the stock market was flat, with the Standard & Poor’s 500 rising in value by only 0.1%.

What does that mean for 2012? The honest answer is that it is anybody’s guess. Using presidential elections to predict the performance of the stock market is in my view unlikely to help investors navigate today’s uncertain and volatile global economy, especially given the impact that Europe continues to have on our domestic markets.

Similarly, it’s also difficult to predict the performance of stocks after the presidential election is over. That’s largely because the president doesn’t have all that much control over how stocks perform. Too many factors outside the president’s control have much larger impacts on stocks – wars, recessions, housing crises, debt crises overseas.

There is one myth, though, that USA Today has busted: despite their largely pro-business platforms, Republican presidents are not necessarily better for the stock market. USA Today writer Adam Shell cited data from the Stock Trader’s Almanac saying that the Dow Jones industrials have actually posted larger average returns under Democratic presidents than they have under Republican ones.

Of course, too much store can’t be placed in the numbers alone. Much depends on what was happening in the country and the global economy during the terms of those Republican and Democratic presidents. Again, outside factors will exert a far greater influence on stocks than will the person occupying the Oval Office.

Tell Us:  Who do you think will win the election and what will their effect be on the markets?

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