Best Quarters of the Four-Year Election Cycle

By Matt Blackman

Last time we looked at the best months of the election cycle to be in the market (see Best Months Click Here) This time we take a step back and look at quarterly performance for the Dow Jones Industrial Average. Buying at the beginning of the month and selling at the end is too short-term for many investors. For the purposes of this analysis, we bought at the beginning of each quarter and sold at the end. What have historically been the best performing quarters over the election cycle to be in the Dow?

 

In all years (see Table 1), Q4 was the best quarter and by only being invested in the fourth quarter every year our hypothetical trader would have captured nearly double that of the next best quarter in all years, Q2.  

Figure 1 – Graph showing quarterly performance between 1902 and 2006 for each election year. Year 1 is the post-election year and year 4 the election year. As you can see the pre-election year (2007) handily outperformed the others. By only being invested for the five quarters from Q4 of the mid-term year to the end of the pre-election year, the hypothetic election trader would have captured 104% of the total gains in the average four-year election cycle.

However, for our hypthetical electionomics trader, the second quarter of the pre-election year (Year 3 which is 2007 this time around) would have earned him the most Dow points at 3918.75 or about two and half times what he would have earned in the best quarter all years.

Next was the final quarter of the mid-term year (Year 2 or 2006 this cycle) and is interesting to note that it followed on the heels of the worst election cycle quarter to be in the market.

 

Table 1 – Each year is color coded for the election year showing Dow quarterly performance in each. We also included performance in all years for comparison purposes. Note that worst quarter is Q3 of the mid-term year which is followed by the second best quarter over the four-year cycle.      

Third quarter (July – September) 2007 scored 7^th out of 16 with a slightly above overall average performance and then in Q4, things get a little better. As we saw in the best and worst election cycle months, September is the only month in pre-election years to lose money which explains why Q3 was the worst performing quarter in the pre-election year. 

Heading into the election year in 2008, the Dow has lost money in Q1 on average and Q2 is even worse. Q3 then slips back into postive territory and Q4 is the third best quarter over the four-year period. The post-election and mid-term years then become pretty tough.

The moral is that the best quarter of the election cycle is now behind us and while the rest of 2007 will be respectable, making money in large caps becomes more challenging in the election year – at least until the last quarter.

The question is, will the Dow perform above or below average this election year especially given the growing challenges in the sub-prime mortgage and housing markets going forward?  

Matt Blackman is a market analyst for www.TradingEducation.com, a free educational website, and is a technical trader, author, reviewer and keynote speaker whose work has appeared in a number of major financial publications, websites and newsletters. He is also the host of www.Electionomics.com a website devoted to investigating the impact of elections on stock markets around the world.  He is a member of the Market Technicians Association (MTA) and Technical Securities Analysts Association (TSAA).