Tuesday, Jul 8, 2008
When the market goes down, incumbent presidents tend to lose. It's down now, and headed further south.
Sep 29, 2004 | The polls are bleak for John Kerry one month before the presidential election, but there is one prognosticator that is on his side: Mr. Market. According to stock market history, which rarely records a win for an incumbent in a year when the market is down, the trend lines indicate that Mr. Market likes Mr. Kerry. What's more, the market is showing clear signs it's about to sink even further in the crucial month before the election.
The general public may have a vague sense that if the stock market is down it's bad for the president and vice versa. Guess what, the experts agree. Jeffrey A. Hirsch, editor in chief of the authoritative Stock Trader's Almanac, slavishly parses every conceivable stock market statistic and trend. Hirsch has tracked presidential election cycles back to 1833 and found a definite pattern: During the year before an election the stock market performs the strongest, averaging a 10 percent return, possibly from the incumbent goosing the economy to look good. Election years boast the second best average: just under 7 percent.
(Then, the chickens come home to roost: The first year of a new term is almost invariably lame. It has the lowest average: 1.6 percent. And the next year is up about 4 percent.)
It's important to remember that the touchstone here is not flat zero: During a typical election year, the market goes up about 7 percent. Since the 20th century, when the president (or his party) stays in the White House the market rises an average of 16 percent that year. If the voters toss them, the Dow averages a 1 percent loss that year.
The market so far this year is down, no matter what flavor index you prefer. The big companies of the Dow are down 4 percent and the tech companies of the NASDAQ have slipped 7 percent. Both broad indexes, S&P 500 and the Wilshire 5000 (the stock geek favorite, which includes all regularly traded stocks), just slipped into negative territory in mid-September.
The measure that most people look at to study the relationship between the market and elections is the entire calendar year, the end of which is still a frustrating three months away. Lucky for us, Hirsch has some other metrics to try: January, the first four months, and the month of October.
The theory is, as January goes, so goes the year. Then to get a sneak preview of the sneak preview, he looks at the first five days of January. So, in early January Mr. Market (legendary fundamental investor Benjamin Graham's nickname for the manic-depressive, sometimes idiotic personification of the market) was shouting, Go Bush, playing Lee Greenwood really loud and extolling the virtues of Bush's strength of character to anyone who would listen. By the end of January, however, his enthusiasm was waning and he was getting annoyed about rising interest rates, the deficit, unemployment, the housing bubble, the war, oh, the list could go on and on. Maybe he was still wearing a Bush pin, but in his heart he was one of those dreaded undecided voters: The Dow was up only 34 points or three-tenths of 1 percent.
Hirsch's next big marker is how the market was doing by the end of April. The Dow was down 226 points or 2 percent. Mr. Market had switched sides! Mr. Market was now preoccupied with Iraq and oil prices and watching Jon Stewart every night. Over the last half-century, Hirsch has found that if the market is down by the end of April, then the odds are 5 in 6 that the incumbent will lose.
Could Mr. Market really be favoring a Democrat? Haven't we always been told that Mr. Market is a tax-averse Republican, who delights in dismantling environmental regulation and sputters with rage at the thought of universal health insurance or consumer lawsuits? Mr. Market doesn't feel that Republican anymore. Mr. Market had a great time under Clinton, but has been kinda blah under the current leadership. Since 1901 the Dow has returned 9.1 percent under Democrats but only 6 percent under Republicans. So, it's not that Mr. Market gets sad when he sees a Republican losing, as some have argued. It's more that Mr. Market, the eternal nonpartisan pragmatist, looks at the current economy and weeps. What's more, there are plenty of signs that Mr. Market is on a boozy downward spiral that he may not snap out of anytime soon.
Investors' intuition tells them that October is a lousy month for the market -- mainly because of that whole 1929 and 1987 thing -- but here experts disagree. As Mark Twain once wrote: "OCTOBER: This is one of the peculiarly dangerous months to speckulate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February." Turns out, according to Hirsch, who has inevitably studied this sort of thing, September is actually the worst month, averaging a 0.7 percent loss, compared to a 0.8 percent gain for October.
So, it's not that the month of October is generally bad. Instead it's a grim outlook for world events and the U.S. economy that's weighing heavily on Mr. Market. Even if Mr. Market pays attention just to sensible fundamental indicators like earnings growth, he gets downhearted: Those numbers are expected to drop in the third and fourth quarters. There are some good things going on in the economy, but Mr. Market seems preoccupied with slipping consumer confidence, the legions of unemployed and oil hitting $50 a barrel.
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