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Commentary: What do election results mean for the stock market?

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After every election, several people usually ask me how the results will impact the stock market. It’s a valid question, and one we should consider carefully.

Let’s examine the two dynamics that are at work when it comes to the stock market and elections: the presidential administration cycle and how united the government is following the election. One is the presidential administration cycle. On the average, the stock market has historically experienced pretty wide swings during the first, second, third and fourth years of a presidential administration. The data tell us that, on average, the third year of a presidential administration yields the best returns from a stock market perspective.

Using data from CFRA, the second year of a presidential administration has resulted in an S&P 500 average return of 5%. The average return over the same period for the third year of a presidential administration is 15.9%

Another major dynamic at play following an election is which party controls the White House, Senate and House of Representatives. Considering the “Washington DC Dominance” chart, which uses data from CFRA, you can see that one party in control of the presidency and both houses of Congress may yield the best results. However, we've also experienced pretty good returns historically when Democrats controlled the White House but Republicans controlled one or both houses of Congress.

While it seems like many of our politicians can't agree on very much these days, one of the things that they do have in common is the desire to get reelected. That’s why, in the third year of a president’s administration, there is probably a little more incentive to focus on policies that would be good for the economy — if that president has a chance to get reelected. After a mid-term election, it is normal for the party in power to lose seats, often resulting in a bit of legislative gridlock. Since there isn’t much change for the market to contend with, you could argue that legislative gridlock is more suitable for the stock market. When an election divides the White House and one or both bodies of Congress, legislation naturally tends to be more bipartisan—and probably more favorable for the economy (senators and representatives want to get reelected, too.)

Obviously, each election cycle is different, just like every economic cycle is different. Past patterns don't always repeat themselves. But, despite the changes elections can bring, the data shows us that historically, there are several reasons to be optimistic.  

David Jackson, MBA, CFP®, C(K)P™, is the Managing Partner at the Southern Springs Capital Group. For more information on Southern Springs Capital Group, visit www.southernspringscapital.com. Our offices are located at 2555 Meridian Boulevard in Franklin. We can be reached at 615-905-4585.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Southern Springs Capital Group is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Southern Springs Capital Group and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Diversification and asset allocation do not ensure a profit or protect against a loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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