Historical Stock Market Performance in Election Years

There are lots of different things that affect the stock market and investors are always looking for patterns that they can profit from. One of the most widely used patterns is the presidential election cycle. Over the years the stock market has tended to perform better in election years than it does in non-election years. Clearly this provides an opportunity for investors to profit if they know how to use it to their advantage.

History shows pretty clearly that the stock market does perform very well during presidential election years. Over the last twenty one presidential elections the market has only been down three times for that year, although the last election was one of those years. In most cases the market does very well being up by double digits and performing better than it does in other years. However there are no guarantees that this will be the case as it can be affected by other things, in 2008 for example it was down by 37% because of the difficulties that the economy ways facing.

The obvious question that has to be asked is why should the stock market perform so well during an election year? The answer that is commonly given is that during election years there are a lot of promises made and more money gets pumped into the economy as the president in office obviously wants the economy to be as strong as it can be to help him or his party during the election. Of course others would argue that it is simply because people expect the market to be up during election years so this in itself tends to drive the market up.

Knowing that the stock market usually performs well during election years does provide you with an opportunity. There is actually a whole cycle of stock market performance that you can use as part of your investment strategy. Historically the weakest year is the second year of a presidential term with the strongest being the election year. This lends itself to using a strategy of buying in the second year and then selling right at the end of the election year. There are lots of studies that have been done that show that this has historically been a profitable trading strategy.

While the historic trends showed on a couple blogs show that election years do affect the stock market you have to be careful and not base your trading strategy entirely on that. The last election year was a good example of why this is the case. The election was held in the middle of a financial crisis and that had a much bigger effect than the election. The result was that the market was down by far more than it had been in any other election year since the Dow came into existence. If you had just blindly based your trading strategy on the election cycle you would have lost heavily.