Wednesday, September 19, 2012

Jeffrey Hirsh - Presidential Election Year Cycle in 2012

Stock Trader’s Almanac 2012
 

Presidential Election Years 2nd Best in Four-Year-Cycle: It is no mere coincidence that the last two years (pre-election year and election year) of the 44 administrations since 1833 produced a total net market gain of 718.5%, dwarfing the 273.1% gain of the first two years of these administrations.

Presidential elections every four years have a profound impact on the economy and the stock market. Wars, recessions and bear markets tend to start or occur in the first half of the term; prosperous times and bull markets, in the latter half. After nine straight annual Dow gains during the millennial bull, the four-year election cycle reasserted its overarching domination of market behavior the last 11 years. However, 2008 was the worst presidential election year on record.

Only Two Losses In Last Seven Months Of Election Years: Regardless which Party is victorious, the last seven months have seen gains on the S&P 500 in 13 of the 15 presidential election years since 1950. One loss was in 2000 when the election's outcome was delayed for 36 tumultuous days, though the Dow did gain ground in the last seven months of 2000. Financial crisis and the worst bear market since the Great Depression impacted 2008.

First Five Months Better When Party Retains White House: Since 1901 there have been 27 presidential elections. When the Party in power retained the White House 16 times, the Dow was up 1.5% on average for the first five months, compared to a 4.6% loss the 11 times the Party was ousted. Since 1950, retaining the White House 7 times brought an average gain of 1.9% compared to –0.1% the other 8 times.

War Can Be A Major Factor In Presidential Races: Democrats used to lose the White House on foreign shores (1920 WW1, 1952 Korea, 1968 Vietnam, 1980 Iran Crisis). Republicans on the other hand lost it here at home (1912 Party split, 1932 Depression, 1960 Economy, 1976 Watergate). Homeland issues dominated elections the last three decades with the Republican loss in 1992 (Economy), and the Democratic loss in 2000 (Scandal), and the Republican loss in 2008 (Economy). As we've learned over the years, it all depends on who the candidates are in 2012.

Market Bottoms Two Years After A Presidential Election: A takeover of the White House by the opposing party in the past 50 years (1960, 1968, 1976, 1980, 1992, 2000, 2008) has resulted in a bottom within two years, except 1994, a flat year. When incumbent parties retained power (1964, 1972, 1984, 1988, 1996, 2004) stocks often bottomed within two years later as well, except 1984 (three years, 1987) and 2004 (one year, flat 2005). Whatever the outcome in 2012, we could see a bottom by 2014.

Only Six Election Year Declines Greater Than 5% Since 1896: Presidential election years are the second best performing year of the four-year cycle. Incumbent parties lost power in five of the six years with declines greater than 5%. Five losses occurred at the end of the second term. FDR defeated Hoover in 1932 and was re-elected to an unprecedented third term as WWII ravaged Europe. Election year 2012 marks the end of the incumbent party’s first term, improving the prospects for a solid year.