Monday, November 10, 2014

Week Ahead Magazine: The Presidential Election Cycle

With the mid-term elections in the U.S. over, the market can focus on the fundamental underpinnings of the economy. Technically, however, the presidential election cycle and the election outcome are suggestive of a positive period for equities. According to Ed Yardeni, Ph.D of Yardeni Research,
  • "...since 1942, the S&P 500 rose on average by 8.5% for the subsequent three-month periods, 15.0% for six months, and 15.6% for 12 months. There was only one out of the 45 periods that was down, and just for three months! One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results."
  • "...using daily data [sine 1928] for the S&P 500. The average gain for the third years of presidential terms was 13.4%, well ahead of the averages for the first (5.2%), second (4.5), and fourth years (5.5). Of the 21 third years, only two of them were down during the Great Depression. The 22 first years and 21 second years each included 10 downers. The 21 fourth years included six negative ones."
Several additional article links highlight the positive equity market returns at this point in the election cycle. The below chart shows the next three calender quarters as the most positive across the complete presidential election cycle.

From The Blog of HORAN Capital Advisors
Source: The Fat Pitch

Maybe confounding investors is the mixed nature of the economic reports in the U.S. and the not so strong reports outside the U.S. This continues the bump along growth environment we believe the global economy will continue to experience in the quarters ahead; thus, giving rise to the proverbial "climb a wall of worry" market.

Economic reports for the week are not heavy; however, a couple of potential market moving reports are,
  • jobless claims and the JOLTS report (Th)
  • retail sales, consumer sentiment and business inventories (F)
Lastly, several article links in the magazine highlight the fact the market seems overbought.  With the market at new highs and elevated investor sentiment, it is easy to conclude the market is due for a pullback. On the other hand, it is noted that sentiment data is most predictive at bearish extremes versus bullish extremes. Below is the link to this week's magazine.

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