May 24, 2004
A Deeper Look At Election Years
With the bad news that's been hitting the market lately, from higher oil prices and higher interest rates to the Iraqi prison mistreatment to the lack of rallies on good earnings news, I thought it would be worth taking a step back to look at the bigger picture. In particular, a review of past election years and previous trends, which favor an eventual recovery by the end of the year.
The Dow Industrials got off to a fast start in 2004 but have since declined to be down about 4.5% in mid-May. So should we now be bearish based on all the recent bad news? The data below says just the opposite, that we should be buying dips in preparation for a positive finish. Why? Look at the Dow Industrials' year-end performance in presidential election years since 1900. We see several encouraging trends. First, the average gain for the past 26 election years in the last century was + 9.7%, which would imply a Dow near 11,400 if the average held up.
Secondly, note that in only 3 of the past 26 cases did the Dow finish down by more than 6% (all three of these losses were in the double digits, though all occurred in 1940 or before). Thirdly, we have not yet seen back-to-back losses in election years, which implies that the loss in 2000 should be followed by a gain in 2004 (with or without chads).
As I dug deeper into how the average election year progresses, I also noticed an interesting pattern that is re-emerging this year: the market tends to be very choppy in the first 7 months of the year, with the Dow plus or minus a few percent on average from its start point. But then a remarkably consistent uptrend develops in the final 4-5 months of the election years on average, which implies that we could remain rangebound until we get through the 2nd quarter earnings reports, at which point the market could get going to the upside. Certainly, a case can be made for the market to be bottled up longer this time, with a tight election and potential terrorist threats hanging over the current pre-election market. But any hold-up will likely lead to an even more dramatic uptrend with these uncertainties clear at election time. So while there will be shakeouts, history suggests that pullbacks will be buying opportunities and that the bulls should prevail by the end of the year in 2004.
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