A Butterfly’s Effect

The butterfly effect is the concept that small causes can have large effects. The United States elected a new president and it’s uncertain what the effects will be. We can, however, look at what has happened historically and, specifically, what happens to the stock market when a new president is elected.

Historically, here are the presidential election’s effect on the stock market:

  • Since 1928, the S&P (a popular measure of stock market performance) has dropped an average of 2.8% in presidential election years that don’t include an incumbent seeking re-election.
  • Of the eight years in a two-term presidential cycle, the final year of the second term, when the incumbent can’t run, is the only year with average negative market returns.
  • By contrast, in years when the sitting president is up for reelection, the S&P has average returns of 12.6%.

It’s imperative to pay attention to history’s lessons. However, here we are at the beginning of the year with a new President and the Dow Jones Industrial Average (DJIA) is hitting record numbers.

You’ve probably heard the DJIA is over 20,000 for the first time in history which makes people ask: “What exactly is the DJIA,” “How is it calculated,” and “Should we pay attention to it?”

Business News Daily provides a great explanation of the DJIA:

“The DJIA is a stock market index created by Wall Street Journal editor Charles Dow. Founded on May 26, 1896, it is named after Dow and statistician Edward Jones. The index itself shows how 30 large publicly owned U.S. companies have traded during a standard trading session in the stock market.”

 The DJIA is designed to provide a clear view of the current stock market, which in turn reflects the state of the U.S. economy. For a detailed explanation of how it is calculated, click here.

The DJIA’s uses and applications are numerous:

  • The DJIA monitors market conditions, enabling investors to identify overall trends and make smarter investment decisions.
  • The DJIA can indicate the future performance of stock holdings, mutual funds, and ETFs relative to the performance of the index.
  • Rather than investing in companies individually, investment directly into the DJIA allows for a diversified portfolio.
  • The DJIA can be used as an effective benchmark to gauge other portfolios and individual investments. A strong portfolio would outperform the DJIA, for example.

Here’s a list of companies currently on the DJIA:

Apple Goldman Sachs Nike
American Express Home Depot Pfizer
Boeing IBM Procter & Gamble
Caterpillar Intel The Travelers
Cisco Systems Johnson & Johnson UnitedHealth
Chevron JPMorgan Chase United Tech
Coca-Cola McDonald’s Visa
DuPont 3M Company Verizon
ExxonMobil Merck Wal-Mart
General Electric Microsoft Walt Disney

What will the butterfly effect of the election be on the stock market in 2017? The DJIA is at its highest point ever, but history tells us the market will drop 2.8% this year. As always, time horizon and asset allocation are two of the main keys to focus on when it comes to saving for retirement. Where will the DJIA be at the end of the term? Only time will tell!

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