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Thursday August 12, 2010
Mid-term elections and market cycles
by Jim Stack, editor InvesTech Market Analyst  The period around midterm elections is nearly always conducive to stock market gains, regardless of the political outcome. We are now coming up on the strongest 3-quarter period of the 4-year Presidential Election Cycle; in fact, the fourth quarter of the midterm election year has the highest average return of all quarters in the cycle (6.3%). Looking back over the last 20 election cycles since 1929, the average cumulative gain over the upcoming 3-quarter period starting in October is a healthy 18.1%. Why is this period so strong? For one thing, most recessions occur in the first two years of a Presidential term, including the early months of the present Administration. By midterm, all actions (both political and monetary) are aimed at getting the economy back on firm footing. 
The environment is so accomodative that only one recession since 1929 has started in the year that follows midterm elections, and that was in December 2007. Another powerful stimulant may be the hope that always springs eternal when a newly elected Congress convenes with expectations that changes will be for the better. While nothing is assured, the odds that the market will see a gain for the fourth quarter of this midterm election year are impressive. The Election Cycle probability of a gain from this upcoming October through December period is about 85%, the highest of any quarter during the cycle. A loss in the quarter is so rare that it has happened only three times since 1929. If we look at the full 3-quarter period from the October before midterm elections through June, the track record is even better with losses for only two periods that occured during the Great Depression of the 1930s. Moreover, the outcome of the midterm election doesn’t appear to have an impact on these results, even in contentious elections. In the last 80 years, control of Congress has shifted at the midterm only five times. In each instance the market ended the fourth quarter higher, with just one minor exception… in 1994, the Democrats lost control of both the House and Senate while Bill Clinton was in the White House. That year the market lost 0.7% in the fourth quarter, but it went on to rally more than 18% in the first six months of 1995. Whatever the reasons behind this unique Presidential Election Cycle pattern, we need to be aware of it as we plot our course ahead. Learn more about this financial newsletter at Jim Stack's InvesTech Market Analyst. |
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