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Affluent Christian Investor | September 19, 2017

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How Does the U.S. Stock Market Perform in Election Years?

In just a few weeks time, the ballots will be in for one of the most controversial elections in U.S. history. Whether the tally ends in a Clinton or Trump presidency, it’s difficult to know the potential range of implications that the 2016 election will have on markets.

In the mean time, investors are wondering how to best position themselves. How could the election possibly affect their portfolio, and how can they hedge against tail risks?

MARKET PERFORMANCE IN ELECTION YEARS

The good news for investors is that historically, the market has performed well in election years with the S&P 500 ending up in positive territory 82% of the time.

The bad news? This is clearly not a normal election.

The following infographic uses data from Fisher Investments to show how the S&P 500 historically performs during U.S. election years, as well as during the terms of specific presidents.

election-years-and-market-outcomes

The aggregate data is clear – here’s how the S&P 500 does in different years of the presidency:

Year of Term      Positive Returns     Negative Returns
1      57%     43%
2      65%     35%
3      91%     9%
4      82%     18%

Even though the election year (Year 4) has positive returns 82% of the time, things obviously get murkier when we look at the current situation.

Clinton and Trump are the two most disliked candidates in history, and third-party candidates such as Gary Johnson, Jill Stein, and Evan McMullin are polling relatively high in certain states.

Some see a Trump presidency as a guarantee for extremely volatile markets, while others see a Democrat landslide as also posing a huge market risk. Meanwhile, there are all kinds of weird hypothetical situations that could occur that would likely give traders migraines.

One of these tail risk events was highlighted by Nate Silver in early October. It involves Gary Johnson winning his home state of New Mexico (where he is polling at 24%) and at the same time neither Trump or Clinton getting enough votes to win the Electoral College. It’s unlikely, but still possible.

No matter how the results shake out, this election year will have long-lasting implications for all market participants, and it is likely that many lessons will be learned by traders.

 

Originally published on Visual Capitalist.

Visual Capitalist creates and curates enriched visual content focused on emerging trends in business and investing. Founded in 2011 in Vancouver and reaching millions of investors each year, Visual Capitalist’s work has been featured in The Wall Street Journal, Gizmodo, The New York Times, Maclean’s, The Vancouver Sun, and Business Insider.

 

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