Editor's note: This article originally appeared June 12 and has been updated as a bonus for
With the U.S. presidential election
, you might be wondering how to manage your portfolio these days.
Let's see what we can learn from the
, which I use as a stock market proxy.
" and "
Trading Model Construction: Tracking the S&P 500
", you can see how by using S&P data, you can develop your own macro trading models.
That said, I have found that the S&P 500 has an interesting trading pattern surrounding the presidential election cycle, which is comprised of four distinct years:
1. Pre-Presidential Election Year (e.g., 2007)
2. Presidential Election Year
3. Post-Presidential Election Year
4. Midterm Election Year (when the House of Representatives is elected along with a third of the Senate)
Cramer: Obama's Win Gives Us Two Markets (Video, Nov. 5)
To watch the video, click the player below:
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Related videos on
: Obama's Pulling for GM and Ford (Nov. 5) and Cramer: The Obama Biotech Winners (Nov. 4).
How to Play a President Election Cycle
Strategy 1: Stick to the Pre-Presidential Election Years
I use S&P data going back to 1950, which as it so happens was a midterm election year. Thus, there were 58 full trading years and 15 presidential elections, which have taken place since that year. The simple average return for the S&P (price only) is 9.37% for the 58 years in my database.
The average return for each of the presidential election cycle years is:
1. Pre-Presidential Election Year: +19.32%
2. Presidential Election Year: +9.29%
3. Post-Presidential Election Year: +3.06%
4. Midterm Election Year (no presidential election but the House of Representatives is elected along with a third of the Senate): +6.03%
This is some very interesting data. Presidential election years are just about on par with the S&P's 58-year average return, which indicates that there is no election year bias. However, pre-presidential election years are very strong, returning nearly twice the average annual results. The post-presidential election year is weak and the mid-tem election year is below average.
One could argue that you can stay out of the stock market for the two-year period between the presidential election and the pre-presidential election year of the next cycle.
Strategy 2: Identify Opportunities in the Quarterly Data
My next step in developing a trading model for a presidential election cycle was to break-out the four-year cycle into 16 quarterly buckets. Here is the result of that analysis:
This data really catches your attention when presented in a graph. In the graph below, the leftmost data point is the first quarter of the pre-presidential election year and the last data point is the fourth quarter of the midterm election year.
As you can see you the chart, the first quarter of the post-election years though the third quarter of the midterm election years, the S&P performed poorly. One reason for this is that with a new president comes new policies. These new policies take time to legislate, enact and then impact the markets. Thus, you may want to lighten up during such periods of major transition.
Conversely, if you are aggressive from the fourth quarter of the midterm election through the end of the presidential election year, you might be able to return above-average gains.
Strategy 3: Understand Party Impact
When developing a trading model, there can always be a few "what if" variables that need to be explored. There is a chance that an incumbent will be re-elected, there is a chance that an incumbent political party holds the presidency or that a new party occupies the White House.
Policy changes are more certain to occur with party changes. This raises the level of investor uncertainty. Furthermore, maintaining the status quo may mollify the markets. Let's see how this theory plays out for the post-election and midterm election years:
The results are rather convincing for the year after the election. The markets do not like a change in power. This bodes poorly for 2009 -- unless the Kennedy election anomaly is repeated.
However, I cannot find any party relationship between the presidential election and the midterm election. For that, I would have to dig deeper and analyze how the balance of power in Congress fared from that election (which is not within the scope of this article).
Notwithstanding party changes, the next question to ask is, "Do parties matter to the market?" Let's take a look, using the table I just presented above.
In the data, there were nine instances of a Republican victory and five instances of a Democratic victory. On average, the year after a Republican election the markets dropped by 1.76%, while the markets advanced the year after a Democratic victory by 11.75%.
Additionally surprising, is what happens in the midterm election year, as the markets are up 7.39% on average in a Republican administration and barely rise for the Democratic victors, who lose their post-election bounce.
The old adage that "turnabout is fair play" seems to be operative in these circumstances.
Strategy 4: Be Short-Term Savvy?
As Election Day is the first Tuesday in November, should we expect an immediate reaction to the results during the last two months of the calendar year? Let's take a peek at how the S&P performed in November and December of the election years.
INCUMBENT / PARTY CHANGE
Incumbent Loses/Party Change
Incumbent Loses/Party Change
For starters, I will note that, on average, the S&P rises 1.78% in November and 1.70% in December. As we can see in the data above, during election years, November is slightly better than its monthly average, while December is slightly worse than its monthly average.
There is no discernable bias here upon which to differentiate general election years from other years. However, one pattern is apparent. When there is a party change, the S&P was higher an average 2.56% five out of seven times -- above the November average.
Bringing down that average was the November 2000 market with an 8.01% decline. This period was more a result of the Internet/technology bubble bursting than a presidential election phenomenon. However, while the sequential December was also up five out of seven times, the average return -- though positive -- was below the historical December average.
The Bottom Line
The presidential election cycle has proven in the past to have periodic market biases which, as an investor, you can use for a macro investment strategy, hedging purposes or quick trades with an index product like an exchange-traded funds (ETFs), such as the
Ultra S&P 500 ProShares
While there may be ways to take advantage of the presidential election cycle, we need to be wary that many factors that were not discussed here also play an important role in the post-election markets. These factors include economic conditions, corporate earnings, interest rate policy and proposed legislation -- to name a few.
At the time of publication, Rothbort was long SSO, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
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