The Market in Election Years

Welcome to 2012, an “election year”!  Be prepared to read up on how this should be a good year for the stock market.  But will it?

Historically, election years tend to be pretty good for the stock market.  The chart below tells the story since 1928:

Source:  http://moneyover55.about.com/od/howtoinvest/a/electionmarket.htm

As you can see, the market made money in all election years with the exception of three.  (I’ve highlighted the down years in red for you.)  And boy did it have a terrific run until the 2000′s came along!

However, the 2000′s brought us a very different result than expected.  Markets haven’t cooperated as they were supposed to.  What’s going on here?  And what will the future bring?

Behavioral psychologists tell us that the human mind automatically looks for patterns, even when they don’t exist.  As an example, one study charted the results of flipping a coin and then told stock market analysts that the chart was of the movement of a stock (heads meant a day “up” and tails was a day “down”).  Stock analysts had no trouble coming up with predictions as to what would happen to this “stock” in the future.  The clear lesson is that even though there was obviously no pattern, stock analysts found one anyway.  (source:  A Random Walk Down Wall Street – Burton Malkiel.)

Here’s the point: some advisors have suggested to clients that an election year is a good time to jump into the market since they see a pattern of election years being good for the market. The trouble is, now there are two election years that were terrible for investors. It makes a person wonder if perhaps this “election year” idea is just another one of those random patterns that, as humans, we naturally look for even when one doesn’t exist.  So what will the markets do in 2012?  Your guess is as good as mine, but I sure wouldn’t rely on this being an election year as the basis for any decisions.