In our August 23rd blog (Has The Market Voted Early?), I suggested that “…year-to-date gains are more consistent with an incumbent party retaining the White House.” Some responses to investor questions following President Obama’s re-election:
The stock market got hammered the day after the election. Is it time to run for the hills?
We don’t think so – just yet. Since 1900, the day after election performance of the Dow Jones Industrial Average has more often than not misled investors about its direction for the next four years. Fifty four percent (54%) of the time, the market finished higher four years later when the DJIA was up on the day after the election. Seventy-three percent (73%) of the time, the market was up over the next four years when the DJIA was down on the day after the election.
As we’ve said, year-end election rallies have been common throughout history, especially if the incumbent party has won. From Election Day to the end of the year, the Dow Jones Industrial Average has climbed a median of +1.9% when the incumbent party has won versus losing –0.6% when the incumbent party lost.
So you’re not worried about the future? Are you crazy?
We’re not saying that there is no cause for concern. Our job is to take an objective look at our research and remove any emotions from our decisions. When investors allow their emotions to control their actions, they tend to be wrong. One of our biggest concerns in the near term is the fiscal cliff .
I keep hearing about a fiscal cliff. What does this mean?
Fiscal cliff is the term used to describe the challenge facing the government at the end of this year when the terms of the Budget Control Act of 2011 are scheduled to go into effect.
Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”
Assuming the fiscal cliff is resolved, the year-end rally remains on the table. But until Congress and the president hammer out the details, the uncertainty will likely keep things volatile for investors.
What else worries you besides the fiscal cliff?
As Jeremy Nelson pointed out in his blog last week (Obama Wins Re-election – Now What?), Q1 of the post-election year has been the worst quarter of the four-year cycle for the S&P 500. And post-war, the post-election year has been the worst of the four-year cycle with a median gain of +5%.
Bottom line: We are in the late stages of a mature uptrend. If the president and Congress can get their act together and come to a fiscal cliff compromise by early December, I think our thoughts of a good fourth quarter will prove correct. There have only been three down fourth quarters in the sixteen post-election years starting with 1948 – 1948, 2000 and 2008. But if gridlock once again raises its ugly head in Washington, compromise delays and politics could kill any hopes of a year-end rally. – Stacey Wall
With the strength in the market last week, our trend indicators have moved back into the bullish zone. The indicators are lower than they were six weeks ago, suggesting that potential gains will be less than we have seen in the early months of the 2013. Economic data continues to be mixed, but the April jobs number came in better than expected at 165,000 new non-farm payrolls. The unemployment rate fell to 7.5%.
Breadth Thrust Buy Signal
Ned Davis Research looked at cases where upside volume exceeded downside volume by 10:1 on the first day followed by at least 4:1 coverage the following day. Twenty-eight such cases have occurred in the S&P 500 going all the way back to 1949. The twenty-ninth case happened on January 2 of this year. The mean and median performances of the S&P 500 following these breadth thrust buy signals is listed below.
S&P 500 % Gain Following Up/Down Volume > 10, >4
+10 Days
+ 1 Month
+3 Months
+6 Months
+9 Months
+12 Months
Mean
1.85
3.33
8.12
13.45
18.04
18.32
Median
1.87
3.17
8.11
13.59
18.52
19.53
Furthermore, the market was up 12 months after a breadth thrust buy signal was generated eighty-nine percent (89%) of the time (25 out of 28 cases).
At 328 days, the length of the current cyclical bull market indicates we may be overdue for some sort of correction (a healthy part of any market cycle). However, for now our indicators continue to lean bullish. – Stacey Wall
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