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Presidential Elections and the Market: a Look Beyond November 8th

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The 2016 Presidential Election has included all of the requisite plot twists required for an event on such a stage.  There have been heated debates, “October Surprises,” and finally a bit of voter fatigue setting in. 

The proverbial gloves were removed a bit earlier than is the case in many elections, allowing for more intensity down the home stretch, but like most elections it is the uncertainty that contributes to elevated market volatility.  The Dow Jones Industrial Average has dropped below 18,000 and hit its lowest prices since July, causing some investors to fear the worst with regard to the market, as Tuesday’s election nears.  We can’t calm your nerves regarding the election outcome, other than to say it’s (likely) almost over.  However, we can offer some historical observations regarding the market that may help you sleep a bit better:

Historically, elections are market incidents not frequent accidents.

While it’s easy to assume that political uncertainly always wreaks havoc on the market, and indeed elections do increase volatility relative to non-election years, there’s little in history to suggest a havoc mandate. In fact, aside from 2008, we have to go all the way back to 1920 to find an election-year in which the Dow was down in both November and December.  Yes, rarely are we deprived of market angst leading up to an election, but rarer still is the market that fails to turn such angst into opportunity by year end.

November/December market tailwinds are often exaggerated in an election year.

Perhaps also due to the relief investors feel after the uncertainty of the campaign cycle has been quelled, a market tailwind is exaggerated in the final months of election years.  The average return of the Dow in November is 1.81% during election years, nearly three times the equivalent return in non-election years.  The average cumulative return over the last two months of the year is 2.8% in an election year, and a positive return occurs 68% of the time (going back to 1900).

Today’s market mirrors what we saw just four years ago, and we can only hope this continues.

While the Presidential campaign season of 2012 provides a rather stark contrast to the 2016 version in terms of candidates and headlines, the market’s preamble to the election offered a bit more similarity.  Four years ago, the Dow and S&P 500 Index (SPX) had hit new 52-week highs in the summer before the election, but the SPX leaked nearly 100 points of oil heading into the election.  Three days after the election the market bottomed, with the SPX sliding just below 1350, a level it’s not come close to revisiting since (SPX currently at 2100).  Fast forward to 2016, the Dow and SPX hit new record highs this summer, but the SPX has once again given back roughly 100 points leading up to the election.   At this point, one can only hope that the script continues to play out as 2012 did.

It’s easy to look at past data and hope it can predict the future, but more practical to simply rely upon the same objective risk barometers that helped to navigate the 2012 market, and many before it, in real-time. When we see the percent of stocks listed on the NYSE that are above their respective 10-week moving average reach readings in the 10-20% range, we know this to be historically oversold.  The NYSE High Low Index, similarly, provides reliable buy signals for the market when dipping below 20% and finding a bottom.  There are other indicators in the stable of the DWA Research Platform, and collectively they can provide confidence as to whether election-related volatility should be viewed more as an omen, or an opportunity this time around.  The DWA Daily Equity Report, a staple of the DWA Research Platform, is another good source for real-time information and analysis as we head into next week and the aftermath of the Presidential Election—whatever that may be.

If you’d prefer to place a true bet on the election, without putting retirement assets to work, you can always turn to the Presidential Futures Markets. The Iowa Electronic Exchange allows you to buy or sell presidential futures that pay out based upon the outcome of the election. Futures contracts are available for either major party with “losing” contracts going to $0 after Election Day; while the winner pays out at $1. Point & Figure charts of both contracts are available on our Research Platform, and it’s one way to put your money where your mouth is…or hedge your bets.

To learn more the DWA Technical Research Platform, click here to take a free 21-day trial. To learn more about Relative Strength and the Dorsey Wright Relative Strength strategies, download the whitepaper Point & Figure Relative Strength Signals, or contact us here.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm.  Neither the information within this article, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities, or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.

Trading security futures contracts involves risk and may result in potentially unlimited losses that are greater than the amount you deposited with your broker. 

Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives.  Advice from a financial professional is strongly advised.

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