The American stock market will rise this year – no matter who wins the presidential election. That at least is the conclusion of a respected US fund manager who has studied stock market trends in election years all the way back to 1926.
The finding could spur investors, to start buying American shares – especially as the US economy is looking healthier.
In a study of the fortunes of the US stock market in election years, Fisher Investments, which is run by the renowned fund manager Ken Fisher, found that just one outcome – the replacement of a Republican president by a Democrat – tended to be associated with a fall in share prices. That outcome cannot happen this year as a Democrat, Barack Obama, is standing for re-election. When this happens, stock markets tend to rise, regardless of whether the incumbent is re-elected or replaced by his Republican opponent, according to Fisher.
The S&P 500 index has historically risen by an average of 14.5pc in the year of a Democrat’s re-election, the study found, whereas the other possible result this time, the replacement of a Democrat by a Republican, has seen the index rise by 18.8pc on average.
The re-election of a Republican has, on average, been associated with a 10.6pc rise in the S&P 500, but when a Republican has been replaced by a Democrat, shares have tended to fall, by an average of 2.7pc.
Whitney George of Royce & Associates, a subsidiary of Legg Mason, the fund manager, said: “Ned Davis [an American consultancy] recently looked at presidential elections going back to 1928 and found that markets had risen in the second half of an election year about 80pc of the time. There are other patterns which show that they tend to bottom out mid-year and rally into the election, depending on who wins.
“Historically, the incumbent has frequently produced a strong rally right through the end of the year. I think that’s a function of the way the market looks forward and discounts the future. In May and June, there was something close to maximum uncertainty about the elections, but as we approach November I think the market moves on and begins to look forward to other concerns.”
America’s economic recovery seems well established, if unspectacular. “Growth of about two per cent is strong enough to prevent a slide back into recession but not high enough to get unemployment falling,” said Paul Dales, a US specialist at Capital Economics. “It’s not particularly good for the American economy after a sizeable recession.” He added that America’s climb back to health should continue as households gradually cut their debts.
Some investors are worried about the so-called “fiscal cliff” – tax rises and spending cuts due to take effect shortly – and are pinning their hopes on Congress acting to delay the changes. “The fiscal cliff is scaring the devil out of people, but the world is not going to come to an end if Congress doesn’t act,” said Mr Schwartz. “We are not going to go from growth to recession overnight. It’s in the interest of all the parties to resolve the problem, and all the data shows that the economy is on the mend.”
Jupiter’s Merlin multi-manager team agreed. John Chatfeild-Roberts, the head of Merlin, said: “The US housing market has stabilised and will recover. This should bolster the domestic economy in general.”
Getting a slice of American pie
You could, of course, pick individual shares yourself. However, this requires a lot of research, and being remote from the companies and the markets in which they operate could mean missing out on snippets of useful information. So most investors would probably prefer to get exposure to American shares via pooled funds such as unit or investment trusts.
The big decision is whether you are happy to back the market as a whole, in which case a cheap tracker fund will suffice, or want to aim for better returns, which means choosing an actively managed fund.
Nowhere is the job of an active manager harder than in the US. Historically, they have struggled to produce consistent outperformance of the wider market – a fact attributed to the strict rules that require companies to disclose all relevant information to the market.
“The US is something of a graveyard for active fund managers and we prefer to recommend a passive index-tracking fund for our clients,” said Mr Pemberton.
Whatever fund you buy, don’t forget that fluctuations in the dollar could affect your returns as much as movements in the share prices. The exchange rate could work in your favour, of course. “We expect the dollar to appreciate strongly against the euro, perhaps to parity, because we think some kind of break-up of the euro is coming,” said Mr Dales. “This would probably also mean some strengthening of the dollar against sterling.”
However, if you prefer not to be exposed to this additional factor, hedged tracker funds, such as iShares S&P 500 Monthly GBP Hedged, with total annual charges of 0.45pc, are available.