OTCPicks Penny Stock Blog

September 11, 2008

Presidential election years are typically good for stocks despite which party wins the Oval Office. There are a few interesting barometers of what might happen in November in looking at history and the statistics of what has happened in the past during election years. A few of them are correct a fairly high percentage of the time.

One indication that is pretty reliable is the movements of the stock market in the 3 months leading up to the election. An up market during the 3 months leading up to the election typically leads to the incumbent party winning the election. A down market during the 3 months leading up to the election generally sees the challenger to the incumbent as the winner.

As of today, September 10th, Obama has the slight edge as the Dow is down a little bit from the August 1st starting point. As you can see from the chart below the Dow, Nasdaq and S&P 500 are all down marginally since August 1st.

According to the Stock Traders Almanac, over the last 60 years jittery investors have tended to pull the stock market down during first half of election years when the incumbent administration was subsequently ousted in the election, and pushed it up in the first half of election years when the incumbent party is eventually re-elected.

Also, according to the Stock Traders Almanac, in years when the incumbent administration won the election, the market had usually bottomed in September and enjoyed a strong October. When the incumbent administration lost the election in November, the market tended to have had a negative October, but then a very strong November.

Probably the state of the economy more than anything is an indicator of which party will win. If people’s lives are good and they are satisfied with the way things are going the incumbents typically win. If people’s lives are in turmoil, having trouble keeping jobs, paying their mortgages, paying for gas and putting food on the table, the incumbents are typically in trouble.

So, where are we at in the U.S. in terms of the good and bad news with the economy which drives the stock market?

The Good News and the Bad News

Freddie Mac and Fannie Mae just got bailed out by the government last weekend. These mortgage giants are the bedrock of the U.S. mortgage industry and to see them in such a state from the overall mortgage market meltdown is a sobering thing. Probably a sign that the mortgage industry shakeout is probably not over yet. And to support that supposition, just this week, Lehman Brothers is the latest financial giant that is in trouble and making desperate moves to spin off divisions and assets to raise critical capital and restore confidence on the street. Still probably going to be other victims in the financial sector before things bottom out.

Last week unemployment numbers came out and are at a 5 year high as employers scale back. Housing prices continue to fall and credit is tight for all but the most credit worthy. Foreclosures continue and the bottom of the housing market has probably not yet been reached.

The only significant good news recently is the price of oil. The price of crude oil reached a stunning high of $147 per barrel on July 11th. Crude oil prices have declined more than 30% off oil’s high and is now right at $102 per barrel. The U.S. dollar has gained strength in recent months as oil prices have risen against the euro, pound and yen, encouraging investors who used commodities to hedge against a weak dollar to reverse those bets.

What does all that mean for the election?

Well, a poor stock market performance is a harbinger of a weak economy, and a weak economy typically bodes ill for the incumbent party retaining the White House (ie, presidents, Hoover, Carter and George H.W. Bush).

The economy is probably is not perceived by anyone to be in terribly great shape right now. And the weak state of our economy probably does not bode well for the incumbent Republican Party this year. We’ll see how the market and the economy do between now and November 4th. If the market picks up and new bull market appears in the next five weeks then the Republicans could pull it out. Either way it’s going to be a close race right to the end it seems, but the rather crappy state of things in 2008 might give the edge to Obama.

Other Political Stock Market Trivia

Here are a few other election year stock-market-related tidbits of wisdom that are based on data and analysis from the Stock Trader’s Almanac.

• In all but one of the last 14 presidential election years, the S&P 500 has gained ground in the last seven months of the year. (The exception was 2000 when the the Supreme Court decided the contested election.) The average gain was 7.2 percent, including a 8.1 percent bounce in 2004. The smallest gain was 3.3 percent in 1956. Right now, to follow that trend the S&P 500 would have to gain more than 168 points or 13.6+%

• Since 1833, the Dow Jones Industrial Average (or a representational equivalent) has posted an average gain of 6.7 percent in presidential election years, with 20 up years and 14 down ones. That will be a huge stretch for 2008 as the Dow is down more than 13% on the year.

• The S&P 500 has averaged a gain of 2.5 percent in Novembers following an incumbent loss. The S&P 500 gains 0.4 percent gain Novembers when the incumbents win.

• Over the first five months following an election, the market has done better with an incumbent victory in 16 of 26 cases since 1901, showing an average gain of 1.5 percent. A victory by the challengers has lead to an average loss of 4.5 percent.

• The stock market tends to decline in the first and second years of any presidency, regardless of the party. If the trend remains, that would mean a market bottom in late 2010.

• Stocks do better over a full four-year presidential term when the challengers rather than the incumbents win.

• New Democratic administrations typically bring Dow 30 rallies two-and-half times larger than when the GOP keeps the White House.

• Since 1945, the S&P 500 has posted an average gain of 10.7 percent during the 28 years a Democrat occupied the White House, vs. 7.6 percent during the 35 years of GOP residency.