Election Day is one year away, and stocks are poised to keep rising over the next 12 months with an incumbent in office — that is if history is any indication.
Since 1952, the Dow Jones industrial average has climbed 10.1% on average during election years when a sitting president has run for reelection, according to the Stock Trader’s Almanac, which is widely used among investors to track historical stock market patterns. Over the same period, the blue-chip average has fallen 1.6% during election years when there’s an open field.
One reason why: There’s typically less uncertainty for people who buy and sell stocks when an incumbent is in office and is running for a second term. In the years leading up to an election, sitting presidents tend to roll out new policies or push for lower taxes in an effort to bolster the U.S. economy, some analysts say.
U.S. stocks have marched to record highs in recent years, helped by the tax overhaul in late 2017 that lifted corporate profits and has extended a decade-long bull run for stocks.
Still, the boost from those tax cuts has begun to weaken. And some investors fear that the tariff battle between Washington and Beijing could raise costs for companies, which could dent growth in their profits. So far, though, earnings in the latest quarter haven’t pulled back as much as analysts expected.
“Despite all of the geopolitical events, things still look good for stocks next year with an incumbent running,” said Jeffrey Hirsch, editor of the Stock Trader’s Almanac. “The potential for a decent trade truce with China, along with an economy that’s still growing and accommodative interest rates add up to a continuation of the bull market.”
Trade hopes
Optimism about a U.S.-China trade deal, a more flexible approach on interest rates from the Federal Reserve and better-than-expected corporate earnings has renewed faith in the 10-year bull market. Signs of a strong U.S. labor market and an improving housing sector have helped alleviate some concerns and propelled all three major U.S. stock indexes to records this week.
That follows a gangbuster stretch for stocks since Trump was elected president. Since Election Day 2016, the Dow has rallied roughly 50%.
Investors received more good news Tuesday. The U.S. service sector, which accounts for more than two-thirds of U.S. economic activity, bounced back in October after slumping to a three-year low the prior month. That comes after two separate reports last week showed that U.S. employment grew at a robust clip in October while consumer spending remained on solid footing in September. What’s key is that the American shoppers remains a bright spot for the economy even as manufacturing and business investment falter.
Retirement planning
If you’re doing an end-of-the-year review of your retirement plan investments, some wealth managers suggest sticking with your current percentage of stocks and bonds.
Mike Piershale, president of Piershale Financial Group in Barrington, Illinois, manages portfolios for retirees and pre-retirees. Most of his clients have 70% toward stocks and 30% to bonds. Since Piershale expects the stock market to keep strengthening through 2019 and into next year, he’s advising clients to remain in their current allocations.
“We’re in the longest bull market in history and we’re overdue for a recession, but good economies don’t die of old age,” Piershale said. “At some point, this (bull market) is going to be over, but there are positive signs that this could last through 2020 at least.”
Hurdles ahead
To be sure, uncertainties remain. An impeachment inquiry into President Donald Trump poses a wild card for the stock market. While an impeachment could threaten near-term gains, it likely won’t trigger steep declines or a recession, some analysts say.
“The markets don’t like uncertainty,” said Sam Stovall, chief investment strategist at financial-research company CFRA, “but the health of the economy probably won’t be threatened by an impeachment because most people don’t think a conviction is likely.”