If you’re trying to figure out what effect the presidential election might have on investing returns, you can look to the Standard & Poor’s 500 for some clues.
Historically, the S&P 500 has gone up 10.9 percent in a presidential election year.
This year, that return could be greater, according to statistics compiled by Fisher Investments.
On average, the S&P500 has gained 14.0 percent in the fourth year of a Democratic administration. The index has only gone up 8.1 percent on average in the fourth year of a Republican administration.
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In general, stocks do better in the second half of a term, than the first half. Here are the overall averages, combining the returns experienced in all administrations:
• Year 1: 8.1%
• Year 2: 8.9%
• Year 3: 18.6%
• Year 4: 10.9%
These figures have been newly updated by Fisher Investments, to reflect 2011, the third year of the Obama Administration.
And this is where reality diverges from historical average. In the Obama case, returns have gone down each year.
The best year was the first year of President Obama’s tenure in the White House. In 2009, when he first dealt with the fallout of the credit crisis, the S&P500 gained 26.5 percent. That was more than triple the historical average in the first year of a president’s term.
In 2010, the gain was 15.1 percent, still almost double the norm.
But last year, 2011, the gain was only 2.1 percent. That was a fraction of the typical surge. In fact, before last year, the average gain in the third year of a president was 19.3 percent. The Obama return of 2.1 percent dropped the historical average down to 18.6 percent.
Why are returns generally higher in the second half of a presidential term?
Here’s Fisher Investments’ analysis:
Legislative risk aversion is often much lower. Presidents typically lose relative power at mid-term elections. They know this, and push for more major legislation in the front half when their power is likely to be greater. You can see this in history—more material legislation has passed in the front half of presidential terms, rather than the back.
New legislation typically results in redistribution of money or property rights, or regulatory changes. Research shows people hate losses much more than they like gains, so when the likelihood of legislation is higher, overall risk aversion rises.. Thus returns in years one and two are more variable with worse averages. But in the back half, when major legislation is less likely, returns have been more uniformly positive with better averages. This doesn’t mean investors should be automatically bearish in years one and two and bullish in the back half—many other factors influence returns. But legislative risk aversion is a material driver investors should consider.