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Being Street Smart 6/18/04


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#1 TTHQ Staff

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Posted 18 June 2004 - 03:18 PM

BEING STREET SMART ____________________ Sy Harding ELECTION YEARS AND THE STOCK MARKET. June 18, 2004. There are as many myths as there are facts about stock market performance in election years. One widely held belief is that the stock market does better when the Republican party is in the White House, supposedly because it favors business interests. But, according to the Stock Traders Almanac, over the last century the market has actually done better under the Democrats. I’m using the numbers for the last century only up to 1995 because the huge bull market of the last half of the 1990s under the Democrats, and the severe bear market of 2000-2003 under the Republicans, would skew the numbers too much. Leaving out those last nine years, according to the Stock Traders Almanac, the stock market gained an average of 8.1% per year from 1901 through 1995 when the Republicans were in the White House, and averaged 10.5% when the Democrats were in the White House. However, there’s another side of the coin. Inflation tended to be higher under the Democrats, and lower under the Republicans. So the better stock market performance under the Democrats was offset by a reduction in the purchasing power of the dollar. Can the stock market possibly predict the outcome of elections? Also according to the Stock Traders Almanac, over the last 60 years nervous or unhappy investors have tended to have the stock market down for the first half of years when the incumbent administration was subsequently ousted in the election, and up in the first half of years when the incumbent party was subsequently re-elected. Another tidbit: June doesn’t seem to be predictive at all, but in election years when the incumbent administration won re-election, July tended to be a down month for the stock market, while when the incumbent administration lost the subsequent election, July tended to be a positive month. Maybe election handicappers should keep an eye on the stock market next month. But keep in mind that all these tendencies are based on averages and only count over the long-term. Individual years can vary considerably from the average. I also found it interesting to look at election year tendencies in relation to my newsletter’s Seasonal Timing Strategy. The strategy is based on the remarkable history of the market making most its gains each year in a favorable season that varies from year to year, but begins in October or November and lasts until the spring or early summer of the following year, while it suffers most of its losses in the opposite period. So, while our technical analysis produces buy and sell signals at any time through the year, buy signals that are triggered in October or November are far and away most likely to be followed by substantial market gains, since they have the added support of the market’s seasonality. So, it’s interesting, again according to the Stock Traders Almanac, that in years when the incumbent administration won the election, the market had usually bottomed in September and enjoyed a strong October. When the incumbent administration lost the election in November, the market tended to have had a negative October, but then a very strong November (to begin the favorable seasonal period). It will be interesting to see how that plays out this year relative to when we get an entry signal for the favorable seasonal period. Getting away from election year tendencies, in last week’s column I said it looked like conditions were allowing a window of opportunity for a summer rally, but added, “Don’t get too excited by the prospect though. Summer rallies are seldom spectacular, and are usually followed by a decline to a more important low in the fall.” So it was also interesting to see a comparison of various types of rallies in the Stock Traders Almanac, and its conclusion that “Last and least is the average 9.6% summer rally.” It defines a summer rally as being from the May/June low to the high reached before the end of September. On that basis, the Dow has already risen 5% from its low at 9906 on May 17. There have also been summer rallies in which the Dow rose more than the average. But that was not always good news. The largest summer rally of the last 60 years saw the Dow gain 23%. That was in 1987. The bad news is that when that summer rally ended in August the market headed down into a 36% decline that culminated in the infamous 1987 market crash to the October low. Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.