Election-Year Markets Can Fool You

Interesting article regarding markets in election years (we mentioned this here and here last week).

EXCERPT: One year before the next U.S. presidential election, prospects look promising for investors in stocks. A new bull market, now 13 months old, has raised the major market indexes 35 percent to 70 percent from their lows in October 2002. Economic growth is at last living up to the hopes embodied in that rally. In the third quarter, we learned last week, U.S. expansion surged to a 7.2 percent annual rate, the highest in almost 20 years.

With all the officials who hope to get re-elected next November, it figures that powerful political forces will be applied to keep those trends in motion. “Election years are traditionally up years,” say Yale Hirsch and Jeffrey Hirsch in the just-published 2004 edition of their Stock Trader’s Almanac. What about the possibility of a rise in interest rates to spoil the party? “Monetary tightening is unlikely to occur before mid-2005,” insist economists at Goldman, Sachs & Co. “Historically, the Federal Open Market Committee has been prone to leave rates unchanged in the period immediately before and after the election, to avoid any appearance of influencing the outcome,” they say. “This is especially true since Alan Greenspan took over as chairman in 1987.”

-Chet Currier, Bush Knows How Election-Year Markets Can Fool You

What’s so fascinating about this data are the recent parallels. Political stock market cycles suggest that the low for the 4 year Presidential term should be made during the mid-term election year of a President’s term — that held true to form, with the lows in July and October 2002. Similarly, the cycle peak should occur sometime in 2004, the Presidential election year. That appears to be on schedule also. However:

Whoa there! President George W. Bush can testify from experience that what is supposed to happen doesn’t always occur in the interplay between politics and finance. His father, the first President George Bush, lost his bid for re-election in 1992, even with the impetus of a rallying stock market behind him. The S&P 500 climbed 47 percent in the 24 months leading up to Election Day ’92. From this we can surmise that if a healthy market doesn’t reliably predict elections, elections can’t guarantee a healthy market either. For half a century, the Stock Trader’s Almanac notes, stocks had an unbroken string of gains going into the last seven months of presidential election years — until 2000 came along.

Unpaid commercial endorsement: The source for all the articles you see on seasonality and calendar cyclicality is the “Stock Traders Almanac.” My 2004 edition just came in the mail. I have had a copy on my desk for years, and it is simply a terrific market reference book. You can order it directly from the Hirsch organization (800-477-3400). Seasonality is just one of many topics in the almanac. Also, those of you who are brokers or asset managers can order the books imprinted with your name and logo imprinted (makes a nice gift for clients). Note: The Almanac published the “Contrary Indicators” piece in their monthly newletter.

-Chet Currier
November 4 2003, Bloomberg
Bush Knows How Election-Year Markets Can Fool You

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