Capital market insights
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Nationwide Market InsightsSM
Markets await political change
The uncertainty around presidential elections generally does not influence financial markets,
but market and economic conditions can foretell election outcomes
Stock returns during presidential election years have
been on par with long-term averages
Positive conditions prior to elections have been good
news to incumbent political parties
Expect volatility to increase in the months leading up
to the election
• There is no obvious historical trend of higher or lower stock market performance during presidential
election years, despite the uncertainty of a potential transition of political power (see left chart below)
Stock returns
during
presidential
election years
have been on par
with long-term
averages
• The S&P 500 posted gains in 76% of presidential election years versus 71% in all years dating back to 1946
(source: S&P Capital IQ, 12/31/45-12/4/15)
• When the presidential election has been decided by a wide margin of victory (a sign of lower uncertainty),
stock performance for that calendar year has been generally strong (see right chart below)
Nothing unusual in election year performance
Nothing unusual in election year performance
Financial markets
Changes in the S&P 500 during presidential
election years
Yearly changes in the S&P 500 by margin of victory in
the presidential election
Percent
Percent
50
20
40
18
30
16
20
14
10
12
0
10
-10
8
-20
6
-30
4
-40
2
0
-50
1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008
< 5%
5-10%
10-20%
> 20%
Margin of popular vote victory
Source: Bloomberg,
data
of March
31, 2016
Stocks
have turned
in as
very
ordinary
performance during presidential election years. On average, the S&P 500 has
risen by 7.0% during election years dating back to 1928, just shy of the 7.4% average across all years during that
time frame.
Not surprisingly for an asset class that places a premium on certainty, however, equities tend to perform much
Capital market insights
better when the margin of victory in the election itself is large.
Source: Bloomberg
|2
Nationwide
Retirement Institute
• The incumbent party has been more likely to keep the White House in times of economic expansion,
strong job markets and low inflation (See left chart below)
Positive
conditions prior
to elections
have been
good news
to incumbent
political parties
• The stage of business cycle is often a reliable indicator of election results. Dating back to 1856, the
incumbent party has won 70% of elections that have taken place during expansions — including more than
90% of those that have taken place in the middle stage of a recovery (see right chart below)
• On all but three occasions since 1928, the incumbent party has won the presidential election when the
stock market was up in the three months prior to the election (source: Strategas, as of 4/4/16)
Stage of business cycle is most crucial in determining election results
U.S. economy
Stage of business cycle is most crucial in determining election results
Correlations with incumbent party electoral vote in
presidential elections
Incumbent party winning percentage in presidential elections
by stage of business cycle
Correlation
Percent
0.8
100
0.6
90
0.4
80
0.2
0
-0.2
-0.4
-0.6
-0.8
Expansions
Recessions
70
60
50
40
30
20
10
0
First Third
Middle Third
Final Third
With an election year upon us, it is a good time to highlight just how important the state of the economy is in
determining
whichFederal
party Election
wins theCommission,
White House.
market
metrics have generally been good indicators of
Source: Bloomberg,
dataLabor
as of March
31, 2016
election results, but the most crucial factor in determining who becomes president has simply been the stage of the
business cycle in which the election takes place.
Dating back to 1856, the incumbent party has won 70% of the elections that have taken place during expansions —
Capital
market
including more than 90% of those that have taken place in the middle stage of a recovery —
versus only
22% insights
of those
that have taken place during recessions.
Source: Bloomberg, Federal Election Commission
|3
Nationwide
Retirement Institute
• Returns for the S&P 500 in the three months before past presidential elections have been almost
1% lower than all other months (source: Strategas, as of 4/4/16)
Expect volatility
to increase in
the months
leading up to
the election
• Stock market volatility in the three months leading up to past presidential elections has been about
45% higher than all other months (source: Factset, as of 1/31/16)
• There’s potential for the market to surprise as the upcoming election nears, given the recent trend
of continuous turnover in party control over different branches of government (see chart below) and
the prevalent anti-establishment sentiment among investors, evident in the rise of Donald Trump and
Bernie Sanders in this year’s party primaries
Voters have removed the party in power in 4 of the past 5 elections
2004
WHITE HOUSE
SENATE
HOUSE
2006
2008
2010
2012
2014
R R D D D D
R D D D D R
R D D R R R
Source: Strategas; data as of April 4, 2016
Capital market insights | 4
Key takeaways
The onset of the presidential election adds another layer of uncertainty to a market that’s already susceptible
to volatility. However, past presidential elections have not had as great an impact on the financial markets as
you may believe. If anything, the opposite is true: market and economic conditions leading up to the election
have proven to be good indicators of which party wins the White House.
As the election campaign continues, consider these steps:
• Prepare for a potential increase in volatility in the months leading up to this year’s election
• Maintain a long-term focus and tune out the noise from news headlines
• Remain confident in the investment plan you established with your financial advisor
For more help or information, contact your financial advisor.
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