The Election
Year Effect:
Myth or Reality?
by Sy Harding, editor
Street Smart Report Online
The
stock market is always up in election years so don't worry!
With the nervousness
created this year by the spring sell-off, I'll bet investors
have heard that calming declaration from their brokers more than
a few times this year. It's a pretty encouraging statement. But
is it true?
Well, over the last
100 years the market was up in 18 of the 25 election years, or
72% of the time. So, it's not a lie that election years are usually
positive.
But let's not let them
off the hook so easily. Forgetting about election years, the
market was up in 65 years out of the last 100, or 65% of the
time, anyway. The difference was produced by the fact that roughly
one extra election year was positive in 100 years. Is that meaningful
enough to tell investors their portfolios are safer in election
years? Of course not.
In recent weeks it's
also become popular on Wall Street and in the financial media
to tell investors that the Dow has not been down over the last
seven months, that is from the end of May to the end of the year,
in any election year since 1950. Is that true?
Well, almost. Actually
it was lower by a few percentage points over the last seven months
just two elections ago, in 1992. But my main problem is not with
the statistic itself, but with the way it's being presented.
The actual statistic is that the market was higher by December
31 than it was on May 31 in those election years. We won't go
into the fact that that is also true of most non-election years.
My problem is that the way the statistic is being presented implies
that the best buying opportunity in the last seven months of
every election year was at the end of May.
We went back and checked.
The reality is that the market was lower, providing a better
buying opportunity later in the year than the end of May, in
six of the last seven election years, or 86% of the time. Those
subsequent lows arrived between August and November each time.
Then there is the fact
that not all statistics regarding election years are positive.
For instance, as reported in The Stock Trader's Almanac,
the market has been down in six out of the last seven election
years in which a president was finishing a second term, as President
Clinton is doing this year.
Between supposedly
positive statistics that are no more positive for election years
than any other years, and the fact that there are statistics
that support both bullish and bearish arguments, it seems that,
like the 2,000 pound gorilla, the market does whatever it wants
to do, unaffected by the fact that it's an election year.
Yet I agree that it
has often seemed that in election years an incumbent party would
prime the pump with government spending and take other steps
to make sure the economy was looking good for voters by election
day. But if 65% of the last 100 years have produced a positive
market anyway, and the number only rises to 72% for election
years, the result may show up in the polls, but doesn't seem
to show up in the market.
And if the market closes down this year it's unlikely to be due to the election, but to fears of lower corporate earnings, thanks to the slowing economy, or to a continuing rise in inflation as higher energy costs spread through the economy, or other factors that drive the market in any year.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy., Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $225 (now in its 13th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com. Mr. Harding has been consistently ranked in the Top Ten Timers for years. He recently authored the book, Riding the BearHow to Prosper in the Coming Bear Market, $12.95. The book introduces The Seasonal Timing System© which tripled the return of the S&P 500 over the last 35 years with 50% of market risk and just two trades a year. Available at most book stores, amazon.com, barnesandnoble.com or StreetSmartReport.com.
