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Do the emotions of presidential elections in the U.S. affect monthly stock returns, either elevating returns based on hope or suppressing them based on uncertainty? To check, we compare returns by calendar month for the Dow Jones Industrial Average (DJIA) during presidential election years to returns during non-election years. Using monthly adjusted closes for the DJIA over the period October 1928 through May 2008 (81+ years and 20+ presidential election years), we find that:
The following chart compares average DJIA returns by calendar month during presidential election years to returns by month for all other years over the period November 1928 through May 2008. The average return for all months over this period is 0.6%. During presidential election years, the average is relatively weak during the early part of the year and relatively strong during the latter part. A possible interpretation is that the candidate selection period is a time of exceptional uncertainty, and the period from party conventions through the election is a time of exceptional hope.
However...
The following chart shows the average DJIA return by calendar month during presidential election years, with one standard deviation variability ranges. Variability of returns by calendar month is generally much larger than abnormal returns, even for the months with the largest average returns. Trading on these abnormalities is therefore risky.
And a further however...
The sample of presidential election years is small in the context of this variability. The next chart depicts the effects of excluding presidential election year 1932, one of huge stock market swings. This exclusion noticeably weakens, but does not eliminate, the findings described above.
In summary, there is some evidence that the U.S. stock market is unusually weak (strong) during January-May (June-December) of presidential election years.
For related research, see Blog Synthesis: Politics and the Stock Market and Blog Synthesis: Calendar Effects. See especially our blog entry of 1/4/08 for other aspects of the relationship between the presidential election cycle and stock market behavior.
