How do presidential elections affect the stock market?

In this Feb. 21, 2016, file image provided by the Philippine Daily Inquirer, from left: Vice President Jejomar Binay; Sen. Miriam Defensor-Santiago; Mayor Rodrigo Duterte of southern Davao city; Sen. Grace Poe; and former Interior Secretary Mar Roxas; listen to a question at a presidential candidates debate held in southern Cagayan de Oro city, southern Philippines. Poe, a political newcomer, leads opinion polls ahead of the May 9 elections, with Binay, close behind. They are followed by Roxas and Duterte in a tight four-way race – a rarity in the Philippines. Lyn Rillon/Philippine Daily Inquirer via AP

QUESTION: Some people told me that it may not be good time to invest now in stocks because many investors are taking wait-and-see stand on the outcome of the elections this May. I have been planning to buy some blue chips that went down recently but not sure if this is the right move. What should I do?—Shara Shandigan by e-mail

There is a theory that suggests that stock market returns tend to be weakest in the year following the election of a new President. According to this theory, the market tends to perform the worst during the first year because the new President would normally try to fulfill campaign promises that may not be necessarily beneficial to the economy in the short term. For example, approving tax increases or supporting budget cuts. Once all the disappointments have been discounted, the stock market would then start to improve upwards. This trend will continue to strengthen and develop into a bullish wave in the next three years until another presidential election begins again.

Apparently, this presidential election cycle theory may only be applicable to the US market. In the Philippines, the pattern seems to be the opposite. The newly elected President would typically be greeted with high optimism by the market, which translates to higher share prices.

Based on market statistics from the last four presidential elections since 1992, the stock market tends to perform better during the first half of the presidency with average returns of 15 percent a year as compared to the last three years with returns of only 5.3 percent. Following this historical pattern, this year being the last year of the incumbent President, the current market could be at the tailend of the cycle. This may be the best time to accumulate stocks, while share prices are still weak, in anticipation of a stronger market after the elections.

A closer look at how the market behaved in the past during periods of presidential election campaign supports this view. Historical data will show that in 75 percent of the time the market tends to rise albeit gradually during February when the campaign period starts leading to the May election with an average return of 5.9 percent.

This behavior manifested itself two weeks ago when the stock market staged a weeklong rally. The index gained as much as 200 points right away to hit 6,848 level after the election campaign formally begun last Feb. 9. If the law of averages were to be followed with target return of 5.9 percent, the stock market must be trading at least at 7,028 level come Election Day.

So why would investors buy stocks at a time when there is uncertainty? Does the market care about who will become the President? Looking at market history, it will seem to show that whoever wins the presidency would be irrelevant for as long as election process was held peaceful and credible.

Historically, market tends to extend its uptrend up to proclamation of the new President with average returns of 2.7 percent. This means that if you started buying stocks in February and held on to it until first week of July, your potential returns should be at least 8.6 percent.

Moreover, this year being an election year, the market expects the economy to benefit from the massive election spending that will happen during the campaign season. Just how much does this increase in spending really benefit the economy? A review of the GDP growth years from the last four presidential elections shows an average extra growth of 1.7 percent brought about by additional consumption from election activities. This expectation of higher economic growth helps drive the stock market to end the year on a positive note. If you started buying today and held on to your stock until year end, you could expect your returns to be as much as 17 percent on the average according to historical returns.

While this year may be historically good for the stock market, next year could be a lot better as the market enters the first part of the presidential election cycle. The stock market has always performed the strongest in the following year after a new President has been proclaimed by experience of all four presidential elections in the past.

Among the four presidential elections that all ended with high return in the following year since assuming office, President Ramos got the highest return of 116 percent. This is followed by President Aquino with 36 percent, President Arroyo with 32 percent and President Estrada with 15 percent. If this pattern holds, then this coming presidential election should be a golden opportunity to build your portfolio by accumulating promising stocks that will outperform the market next year.

Perhaps you can buy index stocks that have fallen by at least 20 percent from its 52-week high to start with. Stocks that are part of the PSE index are safest bet if you are expecting the market to bounce back after the elections. Stocks such as Ayala Land (-23 percent), Robinson Land (-23 percent), Metrobank (-24 percent), PLDT (-31 percent), Globe Telecoms (-33 percent), Megaworld (-41 percent) and ICTSI (-47 percent) can form part of your core holdings.

You may also want to consider buying some stocks that will benefit from the election spending. Media stocks such as ABS-CBN (-20 percent) and GMA7 (-11 percent) and consumer stocks such as Jollibee (-4 percent), Universal Robina (-17 percent) and Puregold (-19 percent) can also offer good trading plays this year.

Market history has shown that presidential candidates do not affect how the stock market should behave. It is the economic impact those presidential elections bring that affect the market direction.

Henry Ong is a Registered Financial Planner of RFP Philippines. Stock data and tools provided by Technistock. To learn more about stock analysis and investment, attend the 9th Accredited Financial Analyst (AFA) program this April 2016. To register, e-mail [email protected] or text <name><e-mail> <AFA> at 0917-9689774.)