Friday, December 28, 2007

Election Year Return For The Dow Jones Industrial Average

The weekly Chart of the Day graphic details the average election year return for the Dow Jones Industrial Average. In the commentary to the chart they note:
With the 2008 presidential campaign now in full swing, today's chart illustrates how the stock market has performed during the average election year. Since 1900, the first five months of the election year have tended to be choppy. That choppiness was then followed with a rally right up to the November election. One theory to support this election year stock market behavior is that the first five months of choppiness is due in part to the uncertainty of the outcome of the presidential election (the market abhors uncertainty) with the market beginning to rally as the outcome of the election becomes increasingly evident.
(click on chart for larger image)

Dow Jones Industrial Average Election Year Average ReturnSource: Chart of the Day

If history provides any clue to the future, the markets could be in for a bit of a bumpy ride in 2008.


3 comments :

Nicolas said...

Market bullishness in elections'years is a myth.

Since market bottom of 1932 until 2004, there have been 19 presidential elections, whereas 6 of them took place in a yearly bearish DJI year, and 13 in a bullish DJI year, which is 31.6% bearish presendential elections'years.

In the same period, there were 50 bullish DJI yearly outcomes for 23 bearish years, i.e. 31.5% bearish years.

The myth probably originates from the stagflationary era from mid-sixties to the seventies with 5 presidential elections in a stretch which took place in a bullish DJI year.

But since then, there have been six more presidential elections, two of which took place in a bearish DJI year (1984 & 2000), which is 33%. In this same time period, there have been only 5bearish DJI years for 16 bullish years, which is 23%. Therefore, the odds of a presidential election to happen in a bearish market year is even higher that the odds of a bearish yearly close.

Question is, does it makes sense to perform statistics on such low sample numbers...

David Templeton, CFA said...

Nicolas,

You are correct in the limited number of data points on which to make an election year market call based solely on the presidential cycle. The Wall Street Journal featured an article on this topic last week. The article is on the paid portion of the site at:

http://online.wsj.com/article/
SB119880660161354537.html?mod=today
s_us_nonsub_money_and_investing

Additionally, in the interest of an upcoming Super Bowl, the same can be said for the market predictability by the team winning the super bowl.

In the end, fundamental analysis of stocks will generate the best investments in the long run.

Nicolas said...

I have posted a graphic description of the relationship between market action and the outcome of presidential elections:

http://www.daily-bourse.fr/analyse-2008-Elections-presidentielles-vtptc-5121.php