Post-Election Outlook

10/29/2004 12:00 am EST

Focus:

James Stack

President, Stack Financial Management

In a non-partisan assessment, Jim Stack and Sam Stovall review the performance of the stock market following a presidential election. At the risk of being a political "party" pooper, we'd note that no matter who wins, history suggests a relatively lackluster post-election market. 

"What should one expect in the closing months of an election year?" asks Jim Stack, market historian and editor of InvesTech. "Between October 13 and year-end, only one election year since 1920 has experienced over a 1% loss in these 10 weeks (that was a 3.6% loss in 1948). Double-digit gains are also rare for this 10 week period, with the last one occurring in 1928. In the vast majority of cases, the stock market was at, or very close to, a yearly high in these months immediately surrounding the election (September through November). Only four election years in the past century have been worse off (further from achieving a yearly high) at this juncture. In 15 of 26 election years since 1900, the DJIA hit its high for the year in the fourth quarter. More importantly, only 3 of 26 election years since 1900 have seen the DJIA hit its low for the year in the fourth quarter. This exemplifies how unusual it would be to see the DJIA drop under 9814 (this election year’s low of August 12).

"What can we expect post-election? Over the past 80+ years, the Fed has made almost twice as many discount rate hikes in the six months after an election than in the six months preceding. Now we’re not saying to prepare for an aggressive tightening in Fed policy. In fact, oil prices are likely tightening the economic purse strings for the Fed. But be prepared. If we see an upside surprise in rebounding economic strength, we would likely also see an upside surprise in interest rates. From a market perspective, we would issue a similar warning. Post-election years (the first year of a new presidential term) have seen more bear markets start than any other year of the political cycle. This is followed by the second year in frequency of bear markets. This does not guarantee a bear market next year. It simply reflects an increased danger level and a reason to be more watchful and defensive."

"Our job is to help you to pick stocks, not presidents," notes Sam Stovall, chief investment strategist for Standard & Poor's. "Consequently, the past few months have seen little comment in these pages on the election, except to note that the closeness of the race may have helped restrain stocks this year. However, we have decided to provide an historical view of what has happened to the stock market in the year following presidential elections. On average, if we look at terms of presidents elected after World War II, the average gain is 3.6%. A president’s first year in office is, on average, the worst of the four for stocks. The best is the third year, which has posted an average gain of 18% in the postwar era.

"This year, we have an incumbent president seeking re-election. If we consider Republican incumbent losses in the postwar era (Ford and George H.W. Bush), we have an average subsequent-year decline of 2.2%. When an incumbent Republican is re-elected, stocks have posted an average loss of 1.8%. If the challenger wins on November 2, we will experience the seventh postwar change in the party controlling the White House. The average loss in the S&P 500 in the next year was 3.2%. Looking at postwar years when the party holding the White House changes and a Democrat wins (John F. Kennedy, Carter, and Clinton), the average gain in the S&P 500 for the following year was 6.2%.

"Based on post-World War II data, the possibilities in this year’s election — a Republican incumbent re-elected (-1.8% the following year), a Republican incumbent defeated (-2.2%), or a party change with a Democrat winning (+6.2%) — there is only an 8.4-percentage-point range between the average high and low results. This leads us to conclude that, based on historical precedent, next year’s stock market could well see only a single-digit percentage move. The historical evaluation is very much in line with our fundamental evaluation of market prospects in 2005."

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