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Markets

The Election Effect

Presidential election years are mostly bullish for investors. Will the pattern play out this year?

As a voter in 2008, you've got plenty to focus on as candidates tackle -- or avoid -- the tough issues. But as an investor, chances are you'll have the wind at your back.

Turns out that election years have been good to investors. Of the 44 administrations since 1833 (dating back to Andrew Jackson's White House days), the stock market has logged an average gain of 7% in presidential-election years, according to The Stock Trader's Almanac. That's not quite the 11% average gain logged in the year immediately preceding an election, but it's well ahead of the average 2% gain in year one and 4% gain in year two of a presidential term. Two-thirds of election years have been up years, with only two exceptions since 1960.

Wars (except the current one), recessions and bear markets tend to start in the first two years of a presidential cycle, and bull markets dominate the second half, thanks to voter-friendly interest-rate, tax and spending policies, designed to aid the incumbent party.

But this is the first election since 1952 in which an incumbent president or vice-president isn't running. That could skew the pattern, says Citigroup portfolio strategist Tobias Levkovich. And although polls and prediction markets tag Rudy Giuliani and Hillary Clinton as front-runners, and (so far) suggest a Clinton victory, it's too early to tweak portfolios.

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Still, some assumptions make sense, such as avoiding energy, defense and health-care stocks if you believe the Democrats will win, Levkovich says. And if a Democratic victory spurs changes in capital-gains and dividend taxes, look for large, one-time dividends beforehand (see Whatever You Call It, It's a Mother). Payout candidates: E.W. Scripps (symbol SSP), Lockheed Martin (LMT) and Winnebago (WGO).