The Election Cycle

Wall Street likes to think of itself as hi-tech and forward-looking, but in reality, the Street is nearly impervious to change. Remember decimal pricing? We adopted the base-10 numbering system some nine centuries after the Visigoths. That’s how fast this place moves.
Only twenty years ago, the Nasdaq didn’t allow margin. And thirty years ago, Wall Street ran on fixed commissions. Can you imagine if any industry was run like that today? Think of what would happen if the price of every new car was fixed. America would make lousy cars that no one would buy, and Detroit would lose billions of dollars. Pretty scary.
One of Wall Street’s oldest and oddest traditions is taking off for Good Friday. Bear in mind that Wall Street hates to take off any day. Trading on Saturdays lasted into the 1950’s. Almost no other business takes Good Friday off. Even the Feds are open. But every year, Wall Street shuts down for Good Friday. Strangely, the stock exchange was open for Good Friday in 1898, 1906 and 1907.
I’m not sure where Holy Week stands in the canon of seasonal trading rules. I’m generally not a big fan of these bits of wisdom. You’ve probably heard the ones like “sell in May and go away.” I’ve always wanted to start my own. The best I got was “buy at Michaelmas and sell at Tet.” It hasn’t caught on.
Despite my misgivings, there does seem to be a weak four-year pattern to stock prices. The market has made several important bottoms during mid-term election years. I would never base an investment decision off this fact, but the history is there. The difference between the four-year cycle and the other seasonal trading rules is that this one is based on some logic.
The idea is that the incumbent president pushes up the economy for Election Day, then everything falls apart afterward. I ran through the Ibbotson numbers and this is what I got.

The year before the election, the market is up an average of 18.2%. In fact, the market goes on a very smooth upward climb through the election year as well, averaging another 12.6%. The problems begin about mid-way through the post-election year. Even discounting 1929, the pattern is still there.
The market hits a brick wall during the summer of the post-election year, and it stays flat for the next 14 months. Then, right before the mid-term elections, the market starts to rally and the cycle starts over again.
Until recently, it looked like the market was following its traditional pattern. In 2002, the S&P 500 bottomed on October 9, just a few weeks for the mid-term elections. The market then rallied strongly before stalling last summer. But in October, the index ignored history and turned higher, and it’s being doing well ever since.

Posted by Eddy Elfenbein on April 12th, 2006 at 4:38 pm

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