Will upcoming election give investors performance anxiety?

Hillary Clinton and Donald Trump will almost certainly be their respective parties’ presidential nominee. Passions and the level of vitriol are sky high and certain to escalate even further heading into the conventions this summer and election in November, leading to heightened anxiety for investors.

With both candidates predicting doom if the other is elected, it’s useful to take a cool, analytical look at how stocks have performed in past presidential/congressional elections.

In a recent report, Sam Stovall, U.S. Equity Strategist for S&P Global Market Intelligence, dissected price changes for the S&P 500 going back to 1945 to see if history provides any clues.

In presidential election years since 1945, the S&P 500 gained an average of 5.9 percent and rose in 71 percent of those years. This trailed the average annual gain of 8.6 percent for all years since 1945 but exceeded the 66 percent positive frequency.

However, looking below the surface yielded a striking divergence between election years at the end of first terms (i.e. incumbent seeking re-election) versus second terms (i.e. non-incumbents seeking election). In the former case, the S&P 500 gained 10.2 percent on average and was up 83 percent of the time. By contrast, in the latter case (our current situation), the S&P 500 dropped by an average of 3.3 percent and rose only 50 percent of the time.

According to Stovall, the reason for the performance differential is Wall Street hates uncertainty. Since World War II, incumbents running for re-election won 80 percent of the time (Truman, Eisenhower, Johnson, Nixon, Reagan, Clinton, Bush 43 and Obama) and lost only twice (Carter and Bush 41). Since it is certain a new president will be elected, investors will have to deal with leadership uncertainty in the coming months.

Additionally, the S&P 500 has been a good predictor of whether the incumbent president, or his party, was re-elected or replaced. In presidential election years since 1944, when the S&P 500 rose in price from July 31 to Oct. 31, the incumbent or his party was reelected 82 percent of the time. When the S&P 500 dropped during these three months, it signaled the replacement of the incumbent 86 percent of the time.

Republican administrations are generally viewed as pro-business. Conventional wisdom is stocks do better with a Republican in the White House and there is, indeed, a huge difference in performance. As is often the case, conventional wisdom is wrong. Stovall calculated from Dec. 31, 1944 to Dec. 31, 2015, the S&P 500 rose an average of 6.7 percent per year during Republican administrations vs. 9.7 percent for Democrats.

During this period, the S&P 500 performed best under the following administrations: Ford (18.6 percent annual average), Clinton (14.9 percent), Obama (12.4 percent) and Bush 41 (11.9 percent). The worst performance was under Nixon (-5.1 percent) and Bush 43 (-4.6 percent).

Finally, contrary to the popular belief “gridlock is good” because when the White House and Congress are controlled by different parties, the odds of “bad” legislation being enacted are theoretically lower, Stovall found the ideal composition for investors is actually one party controlling both branches. This was the case during 28 years since World War II, resulting in an average price increase in the S&P 500 of 10.9 percent (vs. the average 8.6 percent gain for all years).

Past performance in no guarantee of future results. As Mark Twain said, “there are lies, damned lies and statistics.” Still, history offers important clues for investors.

Mickey Kim is the chief operating officer and chief compliance officer for Columbus-based investment adviser Kirr Marbach & Co. Kim also writes for the Indianapolis Business Journal. He can be reached at 812-376-9444 or mickey@kirrmar.com .