Stock markets are said to discount the future. If one studies the election cycle and its impact on market performance, the stock market is telling us that there is a high probability that Barack Obama will enjoy a second term.
Readers may recall that I have been using the historical performance date of the stock market during election years since 1900 to predict the market’s direction in 2012, courtesy of Ned Davis Research. So far, that data had accurately predicted the markets ups and downs all year.
The data shows that the Dow Jones Industrial Average gains an average of 8.6% each election year when the incumbent has won. It gains less when the challenger wins. The Dow is up 8.8% year-to-date. In only three cases over the past 112 years has the incumbent party candidate gone on to lose after being up that much by the end of August. As such, I would say there is high probability (89.7%) that a Democrat will sit in the White House come November.
Of course, you may reject the stock market as an accurate predictor of the future. You may also choose not to base outcomes on probabilities; that is your prerogative. But as a stock market investor you may want to hope that the election year indicator is correct. Here’s why.
In last week’s column I stated that “Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets,” but that kind of thinking flies in the face of realty. Kudos to a reader from Lenox Dale, MA who supplied me with a wealth of statistics which show that stocks have historically fared much, much better under Democratic administrations. The S&P 500 Index has rallied an average 12.1% per year since 1901 when Democrats occupy the White House versus just 5.1% for the GOP.
The overall economy has done better as well with GDP increasing 4.2% annually since 1949 when a Democratic president occupied the oval office compared to 2.6% under Republicans. Our greatest stock market run occurred under Bill Clinton’s watch (1993-2000), followed by the period 1981-1992 under the presidencies of Reagan and Bush.
But enough history, this week we made a little history of our own with all three stock market averages hitting new highs for the year. As expected, the European Central Bank President Mario Draghi outlined the latest European rescue plan. The ECB intends to buy member nations’ government bonds in exchange for further promises to accept outside oversight of their fiscal policies.
Then, on Friday the unemployment data came in weaker than expected. That immediately had gold flying in anticipation that it is all but certain that the Fed will ease next week at their September 13th FOMC meeting. And my wish came true. I said I would like to see the S&P 500 Index break out of its week’s long trading range and it did. It appears more upside awaits us.