Election Surprises: What History Tells Us

02/06/2012 8:00 am EST

Focus: MARKETS

James Stack

President, Stack Financial Management

One of the most useful tools in gauging the current market situation is knowledge of historical precedent. It allows one to remain objective in the midst of emotional upheavals. When combined with careful fundamental and technical analysis, it can provide a solid basis for assessing market risk and planning portfolio strategy.

As 2012 unfolds, the fact that this is a presidential election year should factor into any analysis. If one overlays a long-term graph of the S&P 500 with presidential elections, there is a clear visible link between the four-year election cycle and Wall Street. For instance, bear markets when they occur usually take place in the first two years after a presidential election. Conversely, most politicians realize that it's important for the economy to be back on firm footing and Wall Street to be running smoothly when presidential candidates have to hit the campaign trail again. Although 2008 was an exception, it has historically been very rare for a presidential election year to end with a major loss in the DJIA. Looking back to 1900, the average gain for these election years is 7.3% (not including dividends), and election years that ended with double-digit gains in the Index outnumber those with double-digit losses by nearly 3:1. Moreover, there has been only one time since WWII when the DJIA lost over 10% in a year when presidential candidates were on the ballot.

Not only are election years typically positive for the stock market, but the second half of the year is generally the strongest. More than half of presidential election years have seen the DJIA hit a new yearly high in the 4th quarter. In fact, there have only been six instances in the last 120 years when the DJIA failed to either hit, or come within 5% of, the year's high in the last quarter of a presidential election year. This raises the question of whether 2012-which started off with improving technical and fundamental data-will follow historical precedent and allow investors to reap the benefits associated with the presidential election cycle.

By James Stack, President, InvesTech Research

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