Economists have understood the connection between elections and the stock market since the second half of the 20th century. The cyclical nature of the election process has been shown to be linked to the rising and falling of the economy in a patterned way. Since the 1942 election, both the 4-year presidential elections and the mid-term elections have varied consequences on the state of the financial sector. The history of the stock market after elections is generally consistent.
With a few exceptions the point in which the stock market tracks its lowest returns is during the mid-term point of a presidential tenure. Basically, 2 years after the nationwide election the market reaches its low point during the mid-term elections.
During the period of 1949 and 1960, the cycle was broken. The downturn occurred in the year immediately following the presidential election and only slightly. Most economists consider this to have happened due to the overall rise of American wealth in the postwar era.
The fact that the mid-term is the lowest point has detrimental ramifications for the politicians vying for power. The party in power can use the downturn to blame the minority party if they had just seized power 2 years earlier. Otherwise, the minority can use it against the majority.
With the past knowledge of the highs and lows in connection to the elections process, investors are capable of purchasing and selling stocks for a large gain. Pepperdine University has shown that the ideal opportunity from this cycle is to buy stocks on October 1 before the mid-term and sell on December 31 before the next presidential election.
Regardless of whether history shows that the stock market is impacted by elections, investing in the market involves much more than political changes. While the economy generally falters during the 2-year cycle, each individual sector can either benefit for negatively perform despite the events.
- Rama, Wikimedia Commons, CeCILL, http://en.wikipedia.org/wiki/File:Election_MG_3455.JPG