Approaching a Pre-Presidential Election Year: 2015

Discussion in 'Stock picks and trading strategies' started by Investing Globally, Sep 29, 2014.

  1. In only a few days, the books will close on the third quarter of 2014 and the fourth and final quarter of 2014 will begin. In other words, it means that we are nearing the final stretch of 2014. As we close in on 2014, we were reminded the other that 2015 is the third year of a presidential term, making it a pre-election year, which is often a strong year for the market in terms of positive equity returns.

    To get an idea of the type of precedent that has been set during pre-presidential election years, we can look back to the performance trends over the past 181 years now, including 2011. During this time period, the pre-election presidential year produced a positive return in the stock market, as defined by the Dow Jones Industrial Average [DJIA], which rose 5.53% in 2011. One of the major resources that we use when looking at the presidential election year data is a function of the studying and data compiled by Jeffrey A. Hirsch & Yale Hirsch in their yearly installment of the Stock Trader's Almanac . For those of you who would like more information on this resource, or would like to order a copy of the Stock Trader's Almanac 2014, visit the website www.stocktradersalmanac.com .

    Below is a table that has been reproduced from the Stock Trader's Almanac, which includes the 4-Year Cycle returns beginning with the first full year of a particular President's cycle, going back to 1833. As we mentioned above, pre-election years have historically been a positive time for the market, especially over the past century. As a matter of fact, the last time that the market was down during a pre-presidential year was in 1939. Of the 4-Year Cycle, the pre-election years have historically been the best performing year. On average, the pre-election year has seen a 10.43% gain since 1833, so 2011 was surely under average in its performance with returns only half as much as the average. So, generally speaking, the year before the presidential election and even the actual presidential election years are historically positive for the stock market.

    bw092614_stockmarketsince1933.gif

    One reason why we wanted to bring the upcoming Pre-Presidential Election Year is due to the fact that we are nearing the "sweet spot of the Presidential Cycle," at least according to Jeremy Grantham. In GMO Quarterly Letter: First Quarter 2014 pointed out the power of the returns during the third term of the presidential year as well as a seasonal tendency in this cycle. What Grantham found was that much of the returns generated during the Pre-Presidential Election year occurred around the "seasonally strong" period of the year, which typically lasts from the beginning of the third-quarter thru the end of April, which falls right around the traditional "seasonally strong" period between November and April. According to Grantham, "just holding from the start of the third year (on October 1) and selling at the end of April. In 7 months you make almost all the return of the 48-month cycle (Presidential Cycle)!"

    In the table below, we looked back at the past Pre-Election years, going back to 1951, comparing the S&P 500 [SPX] and the Dow Jones Industrial Average [DJIA]. Notice since 1951, there has not been a single Pre-Presidential Election year when either the DJIA or the SPX has produced negative returns. During the first seven months of the Pre-Presidential Election years, there was only one down year (1979), and the DJIA averaged 20.22% a year, which outperformed the calendar Pre-Election year. However, notice how it trailed the period between October 1st of the previous year to the October 1st of the Pre-Election Year, which is exactly what we entering at the end of the Q3 2014.


    bw092614_preelection_dowspx.gif


    During the traditional seasonally weak and seasonally strong periods, we see similar positive performance trends for the strong periods as well as muted returns for the seasonally weak periods. Notice how the average return during the weak season was 1.24% for the DJIA and 1.82% for the SPX, while the indexes averaged over +16% during the seasonally strong periods. So, whether you choose to take advantage of the third presidential year during seasonally strong periods, from third quart to third quarter, or even simply during the calendar year, there has been plenty of evidence supporting this market tendency.

    bw092614_preelection_dowspx_season.gif


    Finally, while there is definitely a historical bias towards the stock market having a positive year during the Pre-Presidential Election year, it is important to have a logical, organized game plan to manage risk. This is why we have indicators like the NYSE Bullish Percent in order to gauge risk in the equities market, and relative strength measurements, such as DALI, in order to guide us into the stronger areas of the market. However, we thought that the perspectives that have been laid out in the "Stock Traders Almanac" and "GMO's Quarterly Letter" are worth sharing with you today, especially as we are nearing one of the stronger periods of the study.

    Thomas Dorsey - DIF Broker

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