Why the presidential election could boost stocks this year

Historical analysis reveals that stocks tend to do quite well in the second halves of election years.

According to proprietary data generated by Piper Jaffray technical analyst Craig Johnson, the S&P 500 has risen 3.5 percent in the third quarter of an average election year, and followed that up with a 1 percent return in the fourth quarter.

That compares to the negative returns seen in the first and second quarters of the average election year.

For Johnson, the trend makes a good deal of sense, when one considers that the market's greatest enemy is often uncertainty.

"There's a lot of uncertainty upfront in the election process," Johnson said Tuesday on CNBC's "Trading Nation." "Then as we get into the third quarter it starts to become a lot more clear to investors" what's going to happen in November.

So far this year, the market has managed to far underperform the historical election-year average, as the below chart shows. But if history is any indication, the market could see an even greater comeback that it already has.

"That, to me, is really the correct psychology of what we're going to see again this year," said Johnson. "The market likes certainty, and the market likes gridlock."

He explains that while there's plenty of uncertainty in the election cycle at the start of the year, once the outcome of the election becomes concrete, the market can really take off.

Indeed, more certainty crept into the race Tuesday, as the two main parties' front-runners solidified their status.

Donald Trump swept the five Republican primary contests on Tuesday night as he fights for the 1,237 delegates needed to clinch the GOP nomination. Hillary Clinton won 4 of the 5 Democratic contests, losing Rhode Island to Bernie Sanders.

And while the probability of Trump becoming the Republican Party's nominee has risen to 79 percent as of Wednesday, the probability of Trump winning the general election ticked down to 34 percent, according to PredictIt, an online predictions market.

Financial blogger Eddy Elfenbein agrees that investors are best-positioned when Washington is in gridlock.

"It's the unseen change that upsets Wall Street," the editor of the Crossing Wall Street blog said Tuesday on "Trading Nation." "So for now, I wouldn't say investors shouldn't be too concerned about what's going on in the presidential primaries."


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more