This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Will the Market's Direction Determine the Presidency?

By Frank Holmes, CEO and Chief Investment Officer

NEW YORK ( U.S. Global Investors) -- After the first few months of President Barack Obama's term in office, I wrote about the carnival roller coaster the market was riding. Looking at the blue line in the chart below, that post may have foreshadowed his tenure!

The average of four-year presidential cycles from 1953 through 2008 shows that the S&P 500 index generally remains flat for almost the first two years, before heading higher in the second half.

Despite the S&P's wild ride, the market is significantly higher than when Obama took the oath. Does this ensure a victory for the 2012 election?

To paraphrase common fund disclosure, past performance is not indicative of future presidential performance. Rather, victory for the president depends on what the market does in the next few critical months.

If the S&P remains strong, then the answer might be yes, says Adam Hamilton from Zeal Intelligence. He points to research done by InvesTech, which looked at market results during the two months leading up to the presidential election since 1900.

If stocks rise in September and October, the incumbent party usually wins the presidency; if equities drop, the incumbent typically loses. "Out of the last 28 presidential elections, this simple indicator has proven correct 25 times. This is an astounding 89 percent success rate," he says.

Piper Jaffray found very similar results. The firm reviewed the S&P 500 performance for the three months prior to an election year since 1928. According to its study, the incumbent party won 11 out of 14 times when the S&P rose, and lost six out of seven presidential elections when the S&P declined over the three months.

So why does this happen? It's the market's effect on Americans' psyche. Hamilton says, "When the stock markets are strong so everyone feels better about the future, incumbents are more likely to win."

He explains what many of us feel: When stock prices are rising, people are more optimistic and spend more; when markets take a turn for the worse, people become concerned and spend less. "Not surprisingly, these behavioral changes spawned by our rising and falling portfolios also carry over into the voting booths," he says.

With this in mind, a market correction in the months coming up to the election means Americans will "naturally start getting worried and anxious," says Hamilton. "So they start to look for a change in leadership to fix things, to improve the economy and their own chances for success. If an election happens then, they like to vote in new blood for change."

Read his article here .

So how has the market typically performed? Going back to Piper Jaffray's data, since 1928, August has historically been a "much stronger month" during election years as compared to all years. The S&P typically sees a return of about 1% in August; during election years, this number pops to about 3.5%. Also during election years, September and October have historically declined slightly.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%
YHOO $44.52 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs