A common question that I have been asked recently is what I think will happen to the US equity markets after the presidential election results are out. I happen to have a “crystal ball,” i.e. the Stock Trader’s Almanac to assist me. Before I dive into this topic, I want to remind you that regardless of history, there are no guarantees that we will follow the same patterns. Traders still need to rely on their analysis of the trend and supply and demand to make their own trading decisions.
The almanac states that since 1833, the pre-election and election years have been the best performers. Percentage wise, they outperformed the other two years by more than two to one. They continue to state that the first two years of a new term are where wars, recessions, and bear markets usually begin. The last two typically see recovery and bullish times.
An interesting phenomenon also occurs when there is a change in party in the executive office. Looking at the changes throughout the years and the corresponding Dow Jones Industrial Average returns:
1841 Harrison takes office = -13.3%
1845 Polk takes office = +8.1%
1849 Taylor takes office = N/C
1853 Pierce takes office = -12.7%
1861 Lincoln takes office = -1.8%
1885 Cleveland takes office = +20.1%
1889 Harrison takes office = +5.5%
1893 Cleveland takes office = -24.6%
1897 McKinley takes office = +21.3%
1913 Wilson takes office = -10.3%
1921 Harding takes office = +12.7%
1933 Roosevelt takes office = +66.7%
1953 Eisenhower takes office = -3.8%
1961 Kennedy takes office = +18.7%
1969 Nixon takes office =-15.2%
1977 Carter takes office =-17.3%
1981 Reagan takes office =-9.2%
1993 Clinton takes office =+13.7%
2001 Bush takes office =-7.1%
2009 Obama takes office =+18.82%
Out of 18 changes between Democrats and Republicans, (Harrison was a Whig), there were six bullish years when a Democrat took over the Oval Office and only four bearish ones. However, the Republicans did not fare as well. There were five negative years versus three positive ones. I am not going to argue why those years were bullish or bearish, obviously the administrations can inherit a financial mess from both sides.
With the current fiscal cliff issue and weak earnings, it is not hard to see that 2013 is likely to be a bearish year. If Mitt Romney wins the election, then we would have a change in party in the White House and history leans toward a negative Dow in 2013.
Re-election for Obama is no guarantee for a positive 2013 either. Looking at the ten presidents that were re-elected to a second term, only two had positive returns on the Dow in their first year of their second term: Ronald Reagan (R) and Bill Clinton (D). The re-elected Presidents had a larger drop in the equity markets than those years where parties switched.
So what is a trader to expect? 2013 may be rough. According to history, it’s likely to be bearish no matter who wins. We need to trust our chart reading skills and sharpen our shorting techniques as they could be put to the test soon!