November 7th, 2012

The Market and the Quadrennial Election Cycle

Nate Silver has really made a name for himself by accurately predicting the outcome of the past two Presidential Elections through statistical analysis techniques. I’m clearly not a statistician but several people did asked me, both before and since Tuesday, what I thought the elections would mean for the stock market. Which would be (have been) better for the market, a Romney or an Obama victory.  We don’t have to wonder any more because the market responded today with a 2.36% decline, the worst one-day drop in around six months.

Rather than guessing or predicting as to what the future might hold, I decide instead to look at the historical records, the precedents, to see what actually did happen in the years following each of the quadrennial elections since WWII.  It’s the approach I used in developing the market timing techniques underlying the Market Momentum Meter, a tool that has guided the amount of money I should pull out of the market to avoid the risks of a significant market downturn.  Without divulging proprietary information available exclusively to Instant Alerts Members, the Meter is on the verge of changing again from extremely bullish to significantly bearish.

Perhaps the following statistical analysis of the Market’s performance in the 12 months following the quadrennial elections will provide similar guidance:

  • Before yesterday, there were 16 quadrennial elections beginning in 1948
    • The market is not totally agnostic when it comes to political affiliation
      • Nine were won by the Republican candidate, seven by the Democrat
      • Of the 9 Republican wins, the market finished higher the following September 3 times and lower six times
      • Of the 7 Democrat wins, the market finished higher the following September 5 times and lower twice
    • The average changes in the market, as measured by the Dow Industrial Average, has been
      • an average 1.5% gain in the two months to year-end
      • a give back to break-even by the end of the following March
      • an average net gain of 2.0% by the end of the June following the Election
      • a marginal improvement to an average 2.3% by September, or 10 months after the election
  • There has been a wide range of changes during those time intervals:
    • in the 2 months to year-end, the maximum gain was 8.0% and the maximum decline -6.6%
    • in the period to March, the maximum gain was 13.2% and the maximum decline was -8.4%
    • to the following June, the maximum gain was 27.0% (during the Tech Bubble in 1997) and the maximum decline was -11.8% in 1948
    • to the following September, or 11 months, following the election the maximum gain was 31.5% in 2007 and the maximum loss was -19.4% in the Tech Bubble Crash of 2001.

Putting it all together, here’s a picture of the market’s action following each of the quadrennial elections. (click on image to enlarge)

Today’s -2.36% decline is at the outer limits of the total amount of decline that’s usually taking place between the Election and year end.  This one-day drop is more than 14 of the past 16 cycles; the only two that were greater took place in 1948 (-6.6%) and in 2008 when it declined -6.8% at the beginning of the Financial Crisis Crash.

Hopefully, today’s horrible reaction represents about half of the total we’ll see to the end of the year. Unfortunately, if the market isn’t able to recover this loss then there’s a strong possibility that there will be a follow through of the downside at the beginning of next year.

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