Tuesday, 16 October 2012

Top 10 impacts of a Presidential Election on mutual funds

I am fine-tuning my RRSP mutual fund portfolio. That means I am moving to a self-directed LIRA at a discount brokerage. Noticing, as I did, that I was doing this on the cusp of a Presidential Election, I thought my readers would appreciate it to know how this impacts market valuation. Behold - Let's look at the Top Ten impacts of a Presidential election on the stock market...

  1. Even if investors see a rosy pattern shaping up, the question nags: Is it likely to hold up this year? After all, 2008 was a presidential election year, yet the S&P lost a heart-sinking 33.5 percent over the last seven months. Investors learned the election-year rule of thumb has exceptions, and painfully sore ones at that.
  2. On average, the third year of a presidency is by far the best year for stocks. That's not to say it's always the best year. "However, as can be remembered vividly, this approach did not work at all in 2008," warns Citi's Tobias Levkovich. (Source: Citigroup)
  3. Volatility spikes in the 2nd year, then levels off . According to Goldman Sachs' Jose Ursua: "Volatility often sees a first post-election blip (as markets digest changes) and then a gradual increase towards the second year of the cycle."(Source: Goldman Sachs)
  4. Equity returns, worldwide, are better explained when considering US election-related variables U.S. election cycles explain more than just U.S. equity returns. From Goldman Sachs' Jose Ursua: "In particular, the election cycle in the US helps to explain a sizable fraction of non-US equity returns, both in other developed markets and in emerging markets." (Source: Goldman Sachs)
  5. Since 1900, only 5 presidents have seen stocks rise more than 50% during their term. The exclusive club includes Calvin Coolidge, FDR, Dwight Eisenhower, Bill Clinton, and Barack Obama. (Source: Bespoke Investment Group)
  6. When stocks rise significantly during a presidential term, the incumbent usually wins re-election in a landslide. From Robert Prechter: "We deem an election a landslide victory if the incumbent competed for and won re-election by defeating the nearest competitor with an electoral vote margin of 40% or greater...We define a large positive stock market change as a net gain of 20% or more in the preceding three-year period...We conclude that a large net positive stock market change during the three years prior to the election is highly likely to be associated with a landslide victory for the incumbent as opposed to a landslide loss." (Source: Robert Prechter)
  7. You can figure out who will be president based on the 3-month stock market performance preceding an election. From S&P Capital IQ's Sam Stovall: "An S&P 500 price rise from July 31 through October 31 traditionally has predicted the reelection of the incumbent person or party, while a price decline during this period has pointed to a replacement. Since 1948, this election-prognostication technique did an excellent job, in our view, recording an 88% accuracy rate in predicting the re-election of the party in power (it failed in 1968). What's more, it recorded an 86% accuracy rate of identifying when the party in power would be replaced (it failed in 1956)." (Source: Stovall's Sector Watch)
  8. Lately, President Obama's approval rating has been tightly correlated with stocks
  9. Let's bust one myth: namely, that Republican presidents are better for stocks. It is not true. In election cycles since World War II, the Dow Jones industrials have posted bigger average returns under Democratic presidents. (Source: Stock Trader's Almanac)
  10. How have stocks fared from Election Day to year's end? When a Democrat wins, stocks have lost 1%, while rising 4% if a Republican wins. Source( Bespoke Investment Group)


Business Insider
ABC News
Christian Science Monitor

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