In the midst of an election year, particularly one marked by pronounced uncertainty, the overall market tends to decline.
Once a new president is elected and takes over, the market tends to follow a fairly predictable pattern. Normally, the first year of a first term brings market volatility as the new administration settles in. The second year in office normally brings mild overall gains, followed by stronger returns in the third year; on average, but not always, stock prices tend to increase by about 17% during the third year of a first term. By the second term, returns begin to settle down, though still increase to an average above 10% a year. Then, volatility comes back as the election season gets underway, leading to more shallow returns. Since 1833, average returns in an election year hover near 6%, though occasionally they’ve dipped down to negative returns.
Presidential term stages aren’t the only factors that influence the stock market. Who ends up in the Oval Office has a clear impact as well, most notably along party lines. For example, for more than 100 years, the stock market has done better with Democrats in the White House (according to www.nasdaq.com ). Under Democratic leadership, the Dow Jones Industrial Average, a key measure of stock market health (more on that in The Dow chapter), has posted average returns of 82.7%, compared with much tamer average returns of just 44.8% with a Republican at the helm.