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Thursday March 22, 2012
Re-election cycles: Incumbant returns
by Joon Choi, contributing editor Systems & Forecasts Since 1950, there have been nine election years when the incumbent was running. Historically, the stock market significantly outperforms. I wanted to further our study by analyzing their quarterly stock market returns during these years. Average performance of the S&P 500 Index during re-election years is 11.7% as opposed to a loss 3.3% when the incumbent is not running.The difference of 15% is very significant which suggests a favorable stock market in 2012. Our analysis reveals that the 4th quarter was the most favorable period with an average gain of 4.63%, which was almost twice the average of the other three quarters. Moreover, average returns for the other three quarters were fairly close to one another, in the range of 1.9%-2.6%. This shows that, on average, stocks were up every quarter of those election years in which an incumbent was running for re-election, with a stronger performance bias on the 4th quarter. The S&P 500 Index has advanced almost 11% year to date. So, where do we go from here? In order to address this question, I divided the nine re-election years into two categories; years with positive and negative 1st quarter performances. Although we have a small sample size of nine, I feel our findings are still significant. There were six years when 1st quarter returns were positive with an average gain of 6.05%, and three years when 1st quarter returns were negative with an average loss of 4.46%. What we saw is that higher stock prices in the 1st quarter led to slightly positive 2nd and 3rd quarterly returns of 0.96% and 0.71% respectively. In contrast, lower stock prices in the 1st quarter led to a significant price appreciation of 3.65% in the 2nd quarter and 6.42% in the 3rd quarter. Lastly, the S&P 500 Index performance for the 4th quarters were nearly equal, on average, regardless of how stocks had fared during the first quarter. How can you capitalize on our findings? According to our analysis, when the 1st quarter returns are positive, the next big move should not materialize until the 4th quarter. Since 2nd and 3rd quarter returns, on average, resulted in slight stock price appreciation, it may be prudent to have a reduced equity positions until later this year. Learn more about this financial newsletter at Systems & Forecasts. Related articles:
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