US Election 2008 : Bearish or Bullish?

As political debate is gaining more momentum in The US and all the talks about recession is hot, I thought to write a post about politics vs US stocks markets and present some interesting findings that MAY be used to formulate an investment strategy.

  • The Stock Trader’s Almanac, 2004, Yale Hirsch notes that based on his studies, “Presidential elections every four years have a profound impact on the economy and the stock market. Wars, recession and bear markets tend to start or occur in the first half of the term and bull markets, in the latter half. A further elaboration on this strategy is covered is at cybertrader.
  • According to Marshall D. Nickles “Major market cycles usually have abrupt “V”-shaped bottoms with declines in excess of 10 percent. The following stock market recoveries are often by strong economic stimulus invoked by government officials in an effort to counter potentially unpopular economic recessions. Strong doses of fiscal and/or monetary policy stimuli unfortunately often result in creating inflation, which then must be addressed, thereby perpetuating the business and stock market cycles. Given the foregoing scenario, it is not at all surprising to find that the stock market often has made major bottoms about two years before presidential elections and has risen through the end of election year.

Later he points to a study for formulating an investment strategy based on the test that begins with the 1952 election period. Imagine that the first investor had consistently purchased the S&P 500 Index 27 months before presidential elections and had sold near election time on December 31 of the election year. Because a 27-month period seems to provide better returns than other studied periods before the election, a 27-month period was selected for this test. This strategy kept Investor 1 out of the market from January 1 of the inaugural year through September 30 of the second year during the test period. On the other hand, imagine further that Investor 2 bought the S&P 500 on the first trading day of the inaugural year of each presidential election during the test period and liquidated the portfolio on September 30 of the second year of the presidential term. Would either or both of these simple procedures have consistently made money for the investors?Now hold on to your breath, according to his test results –

The first investor put up money 13 times and did not lose money in any period. Gains ranged from a high of 70 percent prior to the 1976 election to a low of 16 percent before the 1960 election. Investor 1 saw the original investment of $1,000 grow to $72,701. This is a percentage gain of 7,170 percent. Investor 2 was not so fortunate. This individual also anted up 13 times, but lost six times. The largest loss of -36 percent was seen after the presidential election of 2000. Investor 2 saw the original $1,000 shrink to only $643, or a loss of -36 percent, in nearly five decades. That percentage is based on nominal dollars and does not include the impact of inflation.

I don’t have data for other countries but I think the same hypothesis might be applicable to other countries as well, especially where markets and economies are already developed. Politics is a major force and a key factor that can shape economy. In my opinion, as an investor one should surely keep politics in perspective when assessing timing for the market based on technical and fundamental analysis.

electionomics-sp500.png So how do we use all this : US Presidential Elections are scheduled for Nov 2008 and according to above theory one would have entered the US markets from Aug/Sept 2006 and plan selling by December 2008. We are surely in a Bull run ! One can argue that we were already in a bull run that started in Mar’03 (almost the same time when US launched strikes on Iraq). Yeah that may be true and I don’t have a counter argument but hey, we are talking electionomics only. Moving forward, we shall see how do markets behave in the next 10-11 months. This is very interesting as there are more and more arguments favoring the bears than for bulls. All the talks for consumer cutting spending, housing slump, credit crunch and US going into recession and past theory favors bulls.

So welcome 2008 and pick your bet, if you must, which way the direction is going to be.

Profitable trading, OP






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