I love to watch the theater that is our Presidential Election process. After the latest round of primaries, I started to wonder what effect this goofy process might have on the stock market. After all, this year has been off to a rocky start. Might this foretell a down year? Let’s look at some statistics.
Since 1900, the stock market has declined in 66% of the years that a President was newly elected. Of course, that means that 44% of the time the market was up too. In those down years, the average decline was 1.2%. The worst decline occurred in 2008 in the last year of the Bush administration when we experienced a 41% decline. We all remember that one. I don’t think the election process had much to do with the down movement, but who knows?
My conclusion is that a Presidential year doesn’t much matter when it comes to the stock market. It’s fun to watch the politics, but they don’t have much impact on investment markets.
Even though we talk about investment markets as being efficient, they are not perfectly efficient because people are involved and people like stories. Since the dawn of our species, mankind has made up stories to explain what we could not understand. Greek myths explain how evil came to exist in the world (Pandora’s box), in Vietnam, a solar eclipse was a giant frog eating the sun, and in China the legend of the White Snake unites good and evil.
The stories that are flying around today about why the investment markets do this or that are further examples of stories made up as a way to explain what we cannot understand. Whether it is a story made up by a journalist and supported by “facts” to fill newspaper space, a story from an entertainer (Cramer) or a explanation created by an individual watching her/his account values go up and down in random patterns, stories are abundant. Be careful to what story you give sanction. Acting on a story can be dangerous to your financial health. No one can predict the future and explaining the past is useless.