There is a lot more on investor’s minds these days than the 2008 Presidential election. However, the Iowa caucuses are just 16 days away and recent polls indicate the races in both parties are extremely unpredictable. Who knows if past market patterns in Presidential election years will hold given the overwhelming focus on the health of the economy and the credit markets. But as a reminder, I want to pass along some info from a Ned Davis Research commentary that went out on Monday.
First, the market tends to trend down in the first half of a Presidential election year regardless of which party ultimately wins the election. The depth of the decline has been more severe in years where the incumbent party loses the White House. Second, the market has rallied from a June low through September regardless of the election outcome. This would seem to coordinate with the determination of the nominees and the optimism that is generally sought at the late summer political conventions. Third, the end of the year has been sensitive to whether the incumbent party wins. When the incumbent party has won, the market has continued to rally right through to year end. When the incumbent party has lost, the market has peaked in September and trended lower until mid-December. Finally, Like many years, Presidential election years have shown a tendency to rally in late December and this has occurred whether the incumbent party wins or loses…..

….You have not had to pay much attention to the political landscape to know that the Democrats are a big favorite to take the White House in 2008. Furthermore, Democrats are expected to add to their majorities in the House and Senate, especially the Senate where the map, open seats, retirements, and number of seats t defend all favor the Democrats. Put it all together and the market is likely to add the election cycle to its expanding list of worries.
Please beware that there are a very limited number of elections upon which this type of analysis is based and there is lots more going on every Presidential election year than the election so isolating movements on the basis of politics or election outcomes may not be possible. A great example of the uselessness of this data is that the market will sell off in fear of the Democrats even though market returns are far superior in periods when the Democrats have held the White House. Nevertheless, with the Iowa caucuses and the New Hampshire primary fast approaching and a very compressed primary schedule (look for nominees to be effectively determined on February 5th Super Tuesday) expect politics to receive a lot more focus form investors and market commentators in the week ahead. I won’t offer an election prediction but I am highly confident that you won’t hear anything new about market trends in election years than what I’ve written here.