21 Jan 2016

Impact of Presidential Elections on Dow Jones

The recent drop in market is making many nervous. Me included. I tried to look for the answers. There are things going on in other parts of the world that has a low co-relation with US markets. For example its a well known fact that Chinese currency as well stock market is highly controlled by their government. It may have a little bearing on us but their stock market is not real economy. The refugee crisis in Europe has a political concern but USA has practically negligible financial impact given the size of US markets.

The other main event currently in progress is of course the presidential election. That led me to analyze how Dow Jones performed the years of political change.

US elections are always in the month of November (at least back till 1976). Anyways, since November is practically the end of the year (Dec being mostly holidays), I decided to add roughly one year on both side of the event to get a correct macro picture. So the window became two years window. For example the elections in 1976 happened on Nov 7 1976. So I considered a window from Jan 1, 1976 to 31st Dec 1977 to find the lowest and highest points in Dow Jones.

I chose 1976 as the base year for two reasons a) There is not much going on in terms of the volume before 76 and anyways the conditions have greatly changed in last forty years.

Interestingly the peaks are always on other sides of the polls day. For example, in 1992 the Dow’s lowest was to 3136 before election of Bill Clinton. It peaked to 3745 in 1993 post elections. And that is mostly the case that Dow goes down before elections and peaks to the high post elections in this two years window. This behavior changed at two instances. First when Bush took over from Clinton in 2000. Dow went down almost 30 %. This is attributable to the dot com bust. Second time it happened when Obama took over from Bush in 2008. The Dow went south by 50%. We all know it was the housing bubble. There was also a down turn in 1976 when Jimmy Carter took over the hot seat. This was a recovery period from 1973-75 recession commonly known as stagflation.

Bill Clinton is the luckiest president to date for Dow Jones. In a single window of his election in 1996, market went up by 61%. Typically the second term of the president is always better for the Dow as we have seen in case of Regan, Clinton and Obama. All registering more than 30% gains thru their second victory.

Beginning of this presidential cycle (July 20, 15 to Jan 20, 16) Dow has already gone down by 14%. Basically we have given away most of the gains of last four years. This is very normal. Average gain over a presidential cycle to next are around 41%. Going by this average the Dow Jones should reach 23000 points by the end of Dec 2017. Which seems like a very steep gain. Even if we consider the gains for presidents running for their first term, the average is 32 % (not shown in the figure) which makes a figure of 21000. This is quite possible for American economy is on a solid ground and there is no real recessionary winds on the horizon.

For average investor, I think we are (or nearing) the rock bottom of this cycle and there are good gains ahead of us unless some thing trivial shows up to rock the boat. Stay put ..

Update as on Jan 30, 2017 - One year since I wrote above article

Dow is tracking fairly to the prediction above, we are past 20 K mark and steady gains in Finance and Energy sectors are likely to pull Dow up and up. 23 K still seems difficult as this is the first term of new president but 21 K appears to probable. We have one full year to add another 1000 points.

Next update in Jan 2018 :-)