Turn On
The Convention-To-Election Indicator -- Let's See If It Will
Predict November's Winner
by Yale Hirsch, editor
Smart Money
As the Democratic convention
has now passed, we turn to the Stock Traders Almanac for one
of the best election indicators, The Post-Convention-to-Election-Day
Forecaster. This indicator has an outstanding track record. Here
the direction of the Dow between the close of the last presidential
convention and Election Day reflects voter sentiment.
If the market rises
between the second major-party convention and election day, the
party currently in power holds onto the White House. Conversely,
the incumbent party usually is ousted if the market during the
period suffers a loss.
Clinton held onto power in 1996 after the post-convention market
posted a 7.0% gain. When the Republicans were ousted in 1992
the Dow was off 1.3%. When Bush won
a third successive term for the Republicans in 1988, the Dow
was up 5.4%, Reagans reelection win in 1984 was accompanied by
a 1.0% gain.
Notice a few anomalies
in the accompanying table. On the sixteen occasions that the
incumbent party won, the Dow was up fourteen times. Everyone
assumed Truman would lose the 1948 race. Victorious wartime leaders
dont fare too well after wars end: Churchill was ousted in 1945,
and Bush was defeated in 1992, in spite of the brilliant Persian
Gulf victory. Trumans tough campaign brought a surprise victory
over a smug Dewey. Memorable was the photo of smiling Truman
holding up the Chicago Tribune front page, "Dewey Beats
Truman." Russian tanks invading Hungary threw the indicator
off course in October 1956.
Incumbent parties lost
nine times in the 20th century. The Dow declined on just six
of the occasions. The three "wrong" predictions had
extenuating circumstances. When a crash in 1929 and the Depression
took stocks down 89.2%, a change in administration accompanied
by a rising market seemed inevitable. Two assassinations and
Vietnam riots in Chicago in 1968, and Americans held hostage
in Iran in 1980, destabilized markets and overpowered this indicator.
Check where the S&P
closed on Thursday, August 17, and where it closes on Election
Day. And may the best candidate win!
Another interesting
seasonal factor is that in the last half-century the market,
as measured by the S&P 500 index, has risen in the last seven
months of election years. Though September is on average the
worst month of the year for the Dow and the S&P, and October
the worst on Nasdaq, take a look at when the low points actually
occurred in the last seven elections. Years when incumbent parties
were ousted are in bold. As 1980 was zonked early by Iran and
rising oil prices, well discount it. In the other two, 1976 and
1992, the Dow bottomed later when the incumbent party was ousted.
For that to happen again could mean that the campaign could get
nasty and go down to the wire with Bush the victor. On the other
hand, a victory by Gore could allow for stocks to get stronger
and move on to new highs on the Dow. Well know in eleven weeks!
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Putting election campaigning aside and switching the focus to stocks, lets examine the bullish factors: A 37% Nasdaq slide this year is a monumental drop. After such a drop, stocks come back. Even the Dow had its bear market of 16.4%. We are still in an industrial revolution and its got a ways to go yet, many more years of Internet, wireless, biotech and new energy technologies. |
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Globalization is going strong and more and more people in many nations are hopping on the bandwagon. We are in the greatest international economic era in history. Liquidity still abounds. The Fed is through raising rates and rumor has it that they could even surprise us with a rate cut. While Nasdaq stocks remained weak, most NYSE stocks have been moving up and continue to do so. The highest support level weve ever seen for Nasdaq has been developing in the 3500 - 3700 range over the past few months on very decent volume. |
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There
are certainly many Cassandras still out there who believe the
big bull market cycle is over. Even Alan Greenspans "irrational
exuberance" in late 1996 proved to be three years premature.
A lot of the air has been let out of the high flyers and now
almost every plausible scenario would make 2001 a bull year.
A Bush victory will give us a tax cut which will push up the
economy. A Gore victory will give us a bigger pay down of the
national debt, which will lower interest rates, which will push
up the economy. Its bullish no matter who wins.
Editors Note:
Yale Hirsch is editor of Smart Money, 184 Central Ave., Old Tappan,
NJ 07675, 1 year, 12 issues, $120, now in its 28th year of publishing.
Mr. Hirsch also publishes the annual Stock Traders Almanac often
described as the "Most Influential Book On Wall Street."
This perennial favorite is a combination market encyclopedia,
forecasting tool, and stock market databank. The Almanac also
serves as a portfolio record keeper and daily desk diary. The
2001 Stock Traders Almanac will be published shortly. To order
send $33.90 to the Hirsch Organization Inc., P.O. Box 2069, 184
Central Ave., Old Tappan NJ 07675. Or call 1-800-477-3400 or
(201) 767-4100. For further information visit the Web site at
www.stocktradersalmanac.com.
