Wall Street’s Best Editor’s Note: Jeffrey A. Hirsch took over the reins of Stock Trader’s Almanac when his father, Yale, retired a few years ago. Our subscribers have enjoyed both Yale’s and Jeffrey’s contributions for many, many years. Yale created The Stock Trader’s Almanac book in 1967, and Jeffrey continues to publish this tome that analyzes decades of market data to determine anomalies, as well as normal cycles.
Yale originated “The January Barometer” and “The Santa Claus Rally,” and he also developed the “The Presidential Election Cycle Theory.” That theory tracks historical market action and has determined that, on average, the market follows a four-year pattern corresponding to the four-year election cycle. And in this recent article from his Stock Trader’s Almanac newsletter, Jeffrey analyzes what we can expect from now through the Election Day—and the good news is that it is good news.
As you can see in the following two charts, election-year Augusts follow a different pattern than all Augusts.
Election-year Augusts tend to start strong and remain in positive territory for the duration of the month while all Augusts over the most recent 21-year period have opened weak, bounced mid-month and finish in the red. In election years, around mid-month, NASDAQ and Russell 2000 tend to pull away from DJIA and S&P 500 to finish with an average gain of around 3%.
According to Investor Intelligence Advisors Sentiment survey, bullish sentiment has been on the rise with the markets and is nearing lofty levels, but it is still not as frothy as it was for as long as it was at the market’s top in May 2015. Bullish advisors were reported at 54.3% most recently compared to 59.5% in early 2015. Bears have retreated to just 20.9% and the correction camp is down to 24.8%. Bullish sentiment is elevated, but it has not reached truly worrisome levels yet which leaves plenty of room for the market to resume its advance in August.
Mid-August to Election Day Performance
Since 1950, the period from mid-August to Election Day in all years has a slightly bullish bias. DJIA and S&P 500 have advanced approximately 60% of the time with average gains of 0.3% and 1.0% respectively. This is actually rather impressive considering the propensity for market declines in August and September. But, since this time span also includes October, the month where numerous bear markets have ended and the subsequent rebound, it is actually not all that surprising.
However, in presidential-election years, the span from mid-August to Election Day over the same time period becomes somewhat mixed. With 2008 in the stats (and 2000 for NASDAQ), average gains shrink considerably with DJIA and NASDAQ posting average losses. The percentage of advances does increase for NASDAQ and Russell 2000. When 2008 is excluded from the stats, there is a solid increase in average performance. DJIA jumps to an average gain of 0.8%, S&P 500 climbs to 1.6%, NASDAQ 2.2% and Russell 2000 3.8%.
In the years that incumbent parties were victorious (shaded in grey), average performance improves nicely. Were it not for 1956, NASDAQ in 2012 and Russell 2000 in 1988, the record would have been perfect. When the incumbent party won, DJIA was up 2.4%, S&P 500 3.2%, NASDAQ 3.6% and Russell 2000 3.6% between mid-August and Election Day. With recent polls suggesting the Democrats are increasingly likely to maintain control of the White House, similar gains this year are also increasingly possible.
Wall Street’s Best Editor’s Note: Which Sectors Will Win?
If the pundits are correct, and the Dems win the White House, common thought is that healthcare, consumer staples and alternative energy sectors should be attractive. Healthcare and alternative energy typically receive a busload of funding under a Democratic administration, while additional monies devoted to lower income families can help prop up the consumer staples industry.
But if the Republicans pull off a win, defense, energy and financial stocks should do well, due to increased military spending and less government regulation.
And despite what many investors think, the truth is, that, historically, the stock market has produced better gains when the Democrats sit in the hot seat at 1600 Pennsylvania Avenue.
Either way, the best bet is to find good, solid stocks with fundamental strengths that will weather any storm—political or economic—in the long run. And in the next couple of issues of Investment of the Week, we’ll explore some ideas in each of these sectors.
Happy investing,
Nancy Zambell
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks
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