Electionomics Report Card
How are we doing so far?
By
Matt Blackman – Market Analyst for
www.TradingEducation.com
Initially, the pre-election year got off to a great
start. Historically a time that has been good to
investors with money in stocks, the third-year has by
far outperformed the other three. But what started out
so well appears to have run into some trouble.
As
February came to a close, March lived up to expectation
coming in like a lion hungrily consuming returns as
markets around the world suffered downdrafts. How does
this compare to past cycles?
Figure 1 – Composite of 9 Republican Presidential terms
since 1928 showing how the S&P500 performed over the
four-year period. On average, the index dropped 3% for
the first two years then enjoyed a gain of more than 27%
for the last two-years of the President’s term. Chart by
www.tradingeducation.com.
In
examining a composite of the 9 Republican
administrations that have taken place since 1928, we see
that on average, the first two years were flat (see
Figure 1). Then miraculously stocks took off and the
S&P500 managed to put on more than 27% in the period
leading up to the next election.
As
you can see from Figure 1, we are just past the half-way
mark which has on average been up 10% (all of the gains
added in just three months).
Figure 2 – Daily chart showing the performance of the
S&P500 Index during the last election cycle beginning in
December 2004. We are now 37.5 months into the cycle in
what should be the best performing period for stocks.
Chart by
www.TraderTech.com
As
you can see from Figure 2, stocks performed far better
than average this term gaining 17% during the first two
years of President Bush’s latest mandate. This continued
until February 27 when a one-day market melt in China
sent shutters through capital markets around the globe.
On February 20, 2007, the S&P500 hit an early-year high
of 1459.70 but by March 14 had dropped to 1387.20, a
correction of 5%.
Now where mon frere?
As
of mid-March the S&P500 was still up 14.5% from the
beginning of Mr. Bush’s term which is quite respectable
considering historic performance. But what can we expect
from here?
There are a number of challenges facing the economy,
first and foremost is the developing maelstrom from
sub-prime and Alt-A (one step above sub-prime)
mortgages. There is an old saying that for every
cockroach you can see, there are a hundred behind the
wall and the sub-prime mortgage cockroaches are starting
to appear. The latest came with the revelation that New
Century Financial, America’s biggest sub-prime lenders
had hit the wall financially and was the subject of a
criminal investigation into lending practices. This
issue alone could put a tremendous crimp in economic
performance going forward: performance that has
traditionally been carried on the backs of U.S.
consumers who are now under increasing financial strain.
It’s different?
A
common chorus heard in the financial media on topics
ranging from the inverted yield curve to skyrocketing
housing prices is that this time it’s different. That is
certainly true and can also be said about the election
cycle. This election cycle so far has been very
different than past cycles mainly because it
outperformed most other periods during the first two
years.
With economic head winds building, there is an
increasing likelihood that stock market returns will be
more muted than usual for the last two years of this
cycle at least so goes the theory. As always, there is
only one way to know for sure and that is to stick
around and watch the show.
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).
