INCUMBENT VICTORIES VS. INCUMBENT DEFEATS

After yesterday’s rant about idiotic single issue analysis re: elections, I did a little more digging into the issue. I came across an interesting take on elections and the market from the nonpartisan Stock Trader’s Almanac .

Their annual diary should be on every trader’s desk. (Disclosure: I’ve contributed several pieces to Almanac, and know Jeff Hirsch, who runs the shop with his dad, Yale.)

In the past, I’ve shown charts overlaying the Market’s performance versus the Presidential cycle. Its pretty reliable. Here’s the Stock Trader’s Almanac take on the issue:

Since 1944 stocks tend to move up earlier when White House occupants are popular but do even better in November and December when unpopular administrations are ousted.

click for larger chart

Actual percent changes reveal that March, June, October and December are best when incumbents stay in power and February, July and September are the worst when they are removed. Ironically, November is best when incumbents are ousted and second worst when they win.

Other interesting tidbits: there were no major losses in October (1984 off fractionally) and only one in March, June and December when incumbent parties retained the White House; Republican wins in November resulted in total gains of 19.7% (excluding no-decision 2000); Democratic victories produced total gains of 2.7%; however, Democrats “gained” 15.6% in December, the Republicans 4.7%.

Fascinating stuff . . .

UPDATE: I’ve gotten several emails on this, and a few readers misconstrued my meaning. A brief clarification on the causality of incumbency losses and the markets:

Whe an incumbent loses, for the most part, its nearly always a reflection of a weak economy. For Bush I, it was a recession (which in actuality had ended 6 months before the election); For Carter, it was runaway inflation (though Americans held hostage in Iran didn’t help); Hoover, it was the Great Depression.

The economy often starts doing better after an incumbent with a lousy record of managing the economy because of a rise for a variety of reasons. After a dud President gets booted, there are immediate benefits. A fresh start is often a good thing; Some optimism about a change for the better starts creeping in.

But very often, merely anticipating a reversal of bad policies generates a good market.

UPDATE: April 17, 2004: 7:26am
Here’s an interesting quote on the subject from Ned Davis Research (Barron’s Interview)

Q:If we have a Democratic president elected this fall, what should we expect from the market?
A: “The stock market has actually done better under Democrats than it has under Republicans. Even better than a Democratic president has been gridlock. The explanation for that is neither party can do too much damage and it’s just checks and balances. I’m not sure that a Kerry victory is really going to shock the market, especially because the polls now show he has got a chance. And it is still going to be a Republican Congress. In 1960, we had a bouncy first part of the year and then the market rallied in the middle of the year. When it looked as if Kennedy had a chance, the market went straight down until the election and then headed straight up for the next 12 months. It had totally discounted that a guy with the initials JFK from Massachusetts would win. That could be a pretty good pattern for what might happen if Kerry wins. Election years are normally bouncy early in the year and then the market takes off. From August to November there is a very dramatic difference if the incumbent wins or the incumbent loses. If the incumbent wins, it goes straight up. When the incumbent loses, the market goes down. In August, after the conventions, you can make a pretty good bet on the stock market. If it looks like Kerry is going to win, the market is going to go down after August.”

Source:
Stock Trader’s Almanac 2004