How stocks perform based on returns in the year after a presidential election
Next week will mark the one-year anniversary of the presidential election that stunned the nation. In the wake of Donald Trump's victory, which defied pre-election polls, the major stock market indexes have extended their quests for record highs. Below, we'll take a look at how the S&P 500 Index (SPX) tends to perform during the last three years of a presidential term, based on performance during the first year of a president's reign.
Best Year 1 Stock Returns Since... Obama
The S&P is pacing for a gain of 20.56% since the November 2016 election. While President Trump likes to tweet about stock market performance since he defeated Hillary Clinton, the SPX actually did even better in the year after President Obama's 2012 election, rallying 23.95%. The index also did better during the first years of Presidents Clinton (second term), George H.W. Bush, and Kennedy.
The record is held by President Franklin D. Roosevelt, whose 1932 election preceded a historic 37.83% jump in the SPX over the next year, and whose unprecedented third election in 1944 resulted in a 32.46% gain, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. However, FDR's second election in 1936 also holds a record: the SPX suffered its worst Year 1 loss of nearly 33%.
A Positive Year 1 Bodes Well for Stocks
Looking at annualized returns, the SPX tends to perform better over the remaining three years of a presidential term when the first year is positive. First Year returns are evenly split between the last 22 presidents, but after a positive start to a term, the index has generated a positive annualized return over the next three years a whopping 81.8% of the time, with an average annualized return of 8.3%. That's compared to an annualized return of 5.3% when the first year of a president's term is negative for the stock market, with a smaller percent positive of 72.7%.
Further, the average negative annualized return after a grim start to a presidency is 10.6%, compared to 3.6% after a positive start. The stock market tends to be less volatile after a positive start to a presidency, too, as the SPX's standard deviation is about half that after a negative Year 1.
Go Big or Go Home
The table below breaks down First Year returns into three categories: Big Gain (gain of least 10%), Moderate Return (anywhere from a 10% loss to a 10% gain), and Big Loss (loss of at least 10%). Trump currently falls under the Big Gain category.
After a big gain in the first year of a president's term, the S&P averaged an annualized return of 10.4% over the subsequent three years -- almost three times the average annualized return after a moderate start to a presidency. The index was in the black 87.5% of the time after a big gain in Year 1, compared to 66.7% after a modest start.
Coincidentally, a big loss to start a presidency has also been better for the SPX over the long term, compared to a moderate return in Year 1. After big losses, the index averaged an annualized gain of 6.6% over the next three years, and was positive 80% of the time. And while the average positive annualized return of 8.5% after a big loss pales in comparison to the average 12% after a big gain, the average negative return of 1.1% is similar, and is much slimmer than the average negative return of 12.3% after a moderate start to a president's term.
Will We Rally Into 2020?
In conclusion, if history prevails, the current bull market could continue for another three years, as strength tends to beget strength for the S&P after a presidential election. In fact, the last time the stock market generated negative annualized returns after a president's election year was after the 2004 victory for President George W. Bush, who wrapped up his term at the heart of the massive financial crisis. Prior to that, you'd have to go back to President Nixon's ill-fated 1972 re-election, which ended with his unprecedented resignation in 1974.