October 2016 Monthly Summary

 

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The stock market’s timid performance over the last couple months turned negative as the S&P 500 dropped 1.8% in October. Interest rates headed north last month, so bond holders were also hard pressed to make money. 1 Overall, there wasn’t much for investors to be optimistic about as the voting public was subjected to new lows in election-related name calling, morality and even potential criminal allegations.

With the election just days away, we prepare ourselves for the most unpopular president to take office in recent times (whomever wins). For sure, this is a very strange presidential run, but given that these elections happen every 4 years, we may be able to draw some conclusions of what is to come from historical data.

Looking at the “average” presidential election, the stock market might have some pensive volatility leading up to the election. However, after the votes are tallied, regardless of the winner, the S&P 500 typically increases over 2% during the following three months. 2 You might concur that the unknown tends to bother markets more than the eventual outcome.

Looking closer at the returns associated with election years, most pre- and post-election market movements could be explained largely by non-election events. The table below shows election year returns for the S&P 500 (not including dividends) as well as the price-earnings ratio of the S&P to represent a fundamental barometer of stock valuations. The two worst post-election results occurred in 2000 and 2008, falling -8 and -10%, respectively. Not by coincidence, these elections occurred in the midst of the fallout from the tech bubble (dot-com bust) and the financial crisis (Great Recession). Looking further into the stock returns from the year following an election, most of the negative returns are a product of recessions or fundamental mean reversion more than a result of newly elected president and their policies.

october-2016-data-chartThe one exception would be the year after the 1976 election when the market was down 12%. There was no recession and PE ratios were very low, but Carter’s first year as president was deeply engrossed in the middle of the stagflation era where inflation was abnormally high, thanks in large part to energy costs, while economic growth was lackluster. It was a very difficult time for stocks, but it had very little to do with the election of Carter.

The Clinton-Trump election is like none other. At the end of the day on November 8th, we will have a new president that won’t be popular. The world will keep spinning and the stock market will keep moving. It can always be “different this time around”, but we still believe that earnings and economic growth are the main long-term drivers of the stock market. One man (or woman) won’t change that relationship, but it could definitely stir up some concern in the short term. We are hopeful that the fear gripping the market now is only coming from the unknown and not from the eventual outcome.

The next few months will be an interesting time, let’s not forget to enjoy our families and friends as we endure the good with the not -so-good.

 

1 Thomson Financial

2 http://www.forbes.com/sites/trangho/2016/11/01/trump-vs-clinton-how-will-the-stock-market-react-to-the-election/#1011f3ae5f37

 

Index information is used to represent market performance, but you cannot invest directly in an index. Past performance is not indicative of future results.
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