Election-Year Trading

08/15/2012 2:50 pm EST

Focus: STRATEGIES

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

The Stock Trader's Almanac’s Jeff Hirsch discusses a few past election years when a sitting President has been up for reelection; the results may surprise you.

Well, 2012 is obviously a presidential election year.  My guest today is Jeff Hirsch from The Stock Trader’s Almanac to talk about trades that happen during election years and how they work.  So, Jeff, talk about the election years.  Is there a seasonality trade, or historical trade about that?

There’s a cycle, you know, election years are the second best year of the four-year cycle.  Last few haven’t been so great—2000, 2008 were pretty nasty, especially 2008; and 2004 was flat—but with this year, we have a sitting president running for re-election.  There’s a particular historical pattern there.  That’s happened nineteen times since the Dow started in 1896, and fourteen of those the Dow has been up.  All of them have averaged about 9% for the Dow, and of the five losses only two of them were really nasty, over 5%.  In 1932, when depression set in, and then in 1940 when World War II was raging pretty hard in Europe, Roosevelt was re-elected, and not when Hoover was ousted in 1932. 

So, we look for a decent ending to the year.  I know we’re about flat or so right now.  Probably have some softness going into the election.  October tends to be stronger when incumbents win and weaker when they lose, but on the flip side of that, when there’s an incumbent that is ousted, November has a pretty strong rally in sort of celebration that there’s somebody new coming in.  So, if you see the market doing pretty poorly in October, president Obama does not get re-elected, you can look for a pretty strong rally in November.

Historically, do you see anything—Democrat versus Republican, how that effects the market in terms of the election?

Less than people would like to believe.  We also looked out forward to sitting president’s wins and losses for the post-election year, the year after, and there’s not a lot of pattern there where Republicans do better than Democrats.  The post-election year, in general, is the weakest of the four years. So new presidents, or even presidents elected to second terms, come in and try to drive a lot of their agenda through early so that they can begin campaigning two or three years later for either themselves or their party to gain re-election. 

So, it doesn’t really matter; Democrat or Republican.  The combination that’s best is a Democratic president, Republican congress. That has had the most market gains over the years.  So, the converse of that has not been great.

Alright, so let’s talk about sectors or the overall market.  Where do you think the opportunities lie for this election-year trade?

I think it lies in staying out of the long equities going through the summer, and getting in during some October weakness.  I think it sets up really nice for the general seasonal pattern of the worse six months being May through October. 

So again, we’ll be looking at a lot of the broad sectors, those broad-sector indexes, most of them come into a seasonally bullish period in either July, August, September, October—so that’s when everyone kind of rallies.

Alright, and in a general seasonal trade, do you recommend playing one side, historically, and just setting a stop loss, or do you recommend hedging it a little bit, too?

We like to layer the seasonal pattern over what’s going on on the ground using the fundamentals. Like with the economic situation going on here, we had a lot of the economic numbers brought ahead in the warm winter and looking at the technical patterns.  So, you use the seasonal pattern as a backdrop. 

Sometimes they set up early—some of the metals or energies bottomed a little bit early this year, because of some of the turmoil going on out there.  So, you have to not just go in blindly to a seasonal pattern—you use it as a framework.

Jeff, thanks for your time.

My pleasure.

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