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Looking Ahead to 2005

There are a few conflicting historical stock market phenomena pertinent to 2005, which is a post-election year and the fifth year of this decade. The S&P 500 index has performed remarkably well in the fifth year of decades since 1881. The index, however, has performed below average in years following an election, except when the incumbent President stays in power or when the post-election year is the fifth year of a decade.

The Fifth Year of Decades Phenomenon

In the fifth year of decades since 1881, the S&P 500 returned, on average, 27.7 percent, which more than doubles the average total return since 1881 of about 11 percent. In addition to the high return, the probability of a positive total return in the fifth year of decades since 1881 is a perfect 100 percent. The probability of a positive total return for all years since 1881 is about 72 percent.

Fifth Year S&P 500 Total Returns
Decade Year Total Return (%)
1881-1890 1885 24.0
1891-1900 1895 4.5
1901-1910 1905 18.9
1911-1920 1915 33.3
1921-1930 1925 28.1
1931-1940 1935 45.0
1941-1950 1945 34.5
1951-1960 1955 30.0
1961-1970 1965 12.0
1971-1980 1975 35.6
1981-1990 1985 30.1
1991-2000 1995 36.4
Mean Return 27.7
Negative Return Probability 0.0

Post-election Phenomena

Historically, the S&P 500 has performed below average in years following elections. In the last thirty post-election years, the S&P 500 has returned, on average, only about 8 percent, with a 43 percent probability of a negative return. When the post-election year is the fifth year of a decade, however (once every 20 years), the S&P 500 has performed well. In those six post-election years, the S&P 500 has, on average, returned about 24.6 percent, with zero negative return years.

Post-Election Fifth Year S&P 500 Total Returns
Decade Year Total Return (%)
1881-1890 1885 24.0
1901-1910 1905 18.9
1921-1930 1925 28.1
1941-1950 1945 34.5
1961-1970 1965 12.0
1981-1990 1985 30.1
Mean Return 24.6
Negative Return Probability 0.0

The S&P 500 also performs above average in post-election years when the incumbent President stays in power. Since 1928, the S&P 500 index has averaged a total return of about 10.4 percent in post-election years, which is below the average for all years of about 12 percent. When the incumbent President stays in power, however, the post-election year returned an average of 13.7 percent compared to only 7.2 when the incumbent either loses the election or is ineligible to run for the Presidency again.

The positive outlook does not, however, mean investors should bet the farm, so to speak, on a positive equity market next year. After all, these phenomena may be entirely coincidental. They are interesting to consider, but stock market trends, like curses against the Boston Red Sox, can reverse themselves most unexpectedly. Consequently, careful, strategic diversification across all asset classes and internationally is still the wisest path to achieve superior long-term returns with the least volatility.

Note: This article appeared in the November 24, 2004 edition of The Daily Record, a law and business newspaper published in Rochester, New York.