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By now, many investors are probably familiar with the election-cycle theory of the stock market. This theory states that the final two years of a presidential administration—the year before an election year and the election year itself—are the best periods for stock market gains. Technically, pre-election years have been the best, posting average annual returns of more than 21 percent since World War II. But election years themselves are no slouches, generating average gains of more than 12 percent a year.
However, this election year is starting out on a rough note, with the S&P 500 down more than 3 percent, the Dow Jones industrial average off more than 6 percent, and the Nasdaq lower by more than 12 percent since the start of the year.
Since Dwight Eisenhower's election in 1952, there have been only three down election years: 1960, when the Dow fell 9 percent; 1984, which saw losses of around 4 percent; and 2000, which saw the markets lose around 6 percent of their value.
To be sure, a 3 percent loss in the S&P or a 6 percent loss in the Dow isn't the end of the world. To some extent, a pull-back is to be expected after a year like 2003, when the S&P soared nearly 30 percent. But in the most recent issue of his InvesTech Research Market Analyst newsletter, James Stack notes that "this weakness during a period of historical stability leaves us with the obvious question: 'Is this a temporary aberration, or is the bull market over?' "
Another question that could be raised: Does the rocky performance in the stock market speak to any concerns that investors and voters may have with the two major party presidential nominees?
It's hard to say. But the good news for long-term investors is that in the end, it doesn't really matter who wins the election when it comes to the stock market. Alan Skrainka, chief market strategist for the brokerage Edward Jones, went back and studied the performance of the stock market from the start of every presidential term going back to Harry Truman in 1948 through the end of 2003.
What he discovered was that the average long-term performance of the stock market, from the beginning of every president's term to the present, has been fairly similar. From the day Truman won election in 1948 to the end of 2003, for example, the Dow has posted annualized returns of around 12 percent. Between Jimmy Carter's 1976 election victory to the end of last year, stocks rose an average of 13.1 percent a year. Since the start of George Herbert Walker Bush's election in 1988, stocks are up 13.8 percent. Since Clinton's victory in 1992, stocks have risen 13.3 percent a year.
