KIM: Will election give investors performance anxiety?

Hillary Clinton and Donald Trump will almost certainly be their parties’ presidential nominees. Passions and the level of vitriol are sky high and certain to escalate heading into the conventions this summer and election in November, leading to heightened anxiety for investors.

With both candidates predicting doom if the other is elected, it’s useful to take a cool, analytical look at how stocks have performed in past presidential/congressional elections.

In a recent report, Sam Stovall, U.S. Equity Strategist for S&P Global Market Intelligence, dissected price changes for the S&P 500 going back to 1945 to see if history provides any clues.

In presidential election years since 1945, the S&P 500 gained an average of 5.9 percent and rose in 71 percent of those years. This trailed the average annual gain of 8.6 percent for all years since 1945, but exceeded the 66 percent positive frequency.

However, looking below the surface yielded a striking divergence between election years at the end of first terms (i.e. incumbent seeking re-election) versus second terms (non-incumbents seeking election). In the former, the S&P 500 gained 10.2 percent on average and was up 83 percent of the time. By in the latter (our current situation), the S&P 500 dropped an average of 3.3 percent and rose only 50 percent of the time.

According to Stovall, the reason for the performance difference is that Wall Street hates uncertainty. Since WWII, incumbents running for re-election won 80 percent of the time (Truman, Eisenhower, Johnson, Nixon, Reagan, Clinton, Bush 43 and Obama) and lost only twice (Carter and Bush 41). Since it is certain a new president will be elected, investors will have to deal with leadership uncertainty in the coming months.

Additionally, the S&P 500 has been a good predictor of whether the incumbent president, or his party, was re-elected or replaced. In presidential election years since 1944, when the S&P 500 rose in price from July 31 to Oct. 31, the incumbent or his party was re-elected 82 percent of the time. When the S&P 500 dropped these three months, it signaled the replacement of the incumbent 86 percent of the time.

Republican administrations are generally viewed as pro-business. The conventional wisdom is that stocks do better with a Republican in the White House. But conventional wisdom is wrong. Stovall calculated that, from Dec. 31, 1944, to Dec. 31, 2015, the S&P 500 rose an average of 6.7 percent a year during Republican administrations vs. 9.7 percent for Democrats.

Over this period, the S&P 500 performed best under the following administrations: Ford (18.6 percent annual average), Clinton (14.9 percent), Obama (12.4 percent) and Bush 41 (11.9 percent). The worst performance was under Nixon (-5.1 percent) and Bush 43 (-4.6 percent).

Finally, contrary to the popular belief that “gridlock is good”—since, when the White House and Congress are controlled by different parties, the odds of “bad” legislation being enacted are theoretically lower—Stovall found the ideal composition for investors is actually one party controlling both branches. This was the case during 28 years since WWII, resulting in an average increase in the S&P 500 of 10.9 percent (vs. the average 8.6 percent gain for all years).

Past performance is no guarantee of future results. As Mark Twain said, “There are lies, damned lies and statistics.” Still, history offers important clues for investors.•

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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC. He can be reached at (812) 376-9444 or mickey@kirrmar.com.