by A.W. Berry

Created on: February 12, 2008

It is a long held notion among investors and market speculators that election years tend to be good years for capital markets. This notion has been reinforced by observations of market performance over several decades and in some cases the last century or longer. However, for the market observations to proven as related to election years, different methods of accuracy testing can be applied to the observations including quantitative and statistical analysis. While economics and market conditions cannot be measured with the same levels of empirical accuracy as some scientific research, the application of the aforementioned analytics help confirm or disconfirm the notion U.S. presidential elections do in fact impact capital markets.

Statistical Positive Election Year Capital Market Performance:

Statistically, United States presidential election years have had a favorable correlation with capital market performance. According USA Today, a national U.S. newspaper, "Election years usually bring good news for stocks", the caveat being the usually it does implication. To illustrate, the newspaper took note of the annual performance of the Dow Jones industrial average, a composite stock index, from the years 1964-2000. Of the 10 election years since then only 1 yielded a negative return and the average of all the annual yields was 9.3%. Similar reports and statistical measurements have been reported from other observers, one such example being the online magazine www.entrapreneur.com which looked at the S&P 500 returns since the 1928. According to that report, the S&P 500 has yielded 2.9% more in election years than non-election years and has averaged 12.6% returns in election years. Yet another examination by www.investmentu.com has put the chances of the "stock market" going higher at 75% since 1888.

So clearly there is a positive trend but does this actually mean US presidential elections actually influence capital markets? Not exactly, while there is clearly a correlation, correlations are not absolute statements and therefore the statement election years influence capital markets cannot definitively be made. Moreover, the capital markets are generally more inclined to "up" years than "down" years based on historical graphing. What can be said is there may be factors that influence the capital markets during election years that are not present or not as great as non-election years.

Market Psychology During Election Years:

Another factor that is considered to effect

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