At first glance it appears as if presidential election years traditionally delivered solid price performances for the S&P 500. Since 1945, the S&P 500 gained an average of 5.9% in price and rose in 71% of all years. And while the average election-year price change was below the average of 8.6% for all calendar years, the frequency of a price increase was better during presidential election years at 71% than was the 66% average for all years.
Separating election-year returns into the end of the first and second terms, however, one quickly sees that the favorable performance during these years was due to the results at the end of the first term, as the S&P 500 rose an average of 10.2% and gained in price 83% of the time. However, election years following second terms saw the S&P 500 fall an average of 3.3% and rise in price only 50% of the time. Why the startling difference? In general, Wall Street hates uncertainty. Since WWII, incumbents running for reelection were approved 80% of the time (Truman, Eisenhower, Johnson, Nixon, Reagan, Clinton, Bush 43 and Obama), and denied only twice: 1980 (Carter) and 1988 (Bush 41). Yet second-term presidential elections generate leadership uncertainty, since both candidates are unknown quantities. Even so, the S&P 500 did quite well in some second-term election years, rising 11.8% in 1952, 7.7% in 1968, and 12.4% in 1988. Yet in 2000 (-10.1%) and 2008 (-38.5%) the S&P 500’s returns probably had more to do with the bear markets that were already in place than concern over who was running for president.