Are markets predicting an Obama victory?

The typical cycle suggests a pullback is coming heading into the election, but it could be more severe if Romney wins.

By MSN Money Partner Sep 24, 2012 2:06PM

Comstock Images Getty ImagesBy Dave Moenning

Although bears may contend that stocks are overbought, that sentiment is too upbeat. It seems the market is a single headline away from a major downtrend.

These days, different indicators point to different directions. The breadth thrust buy signal, one of our favorite market indicators, tells us that the odds favor the bulls in the coming months. But the history of the cycle composite (a combination of the one-year seasonal cycle, the presidential cycle, and the 10-year market cycles) suggests that a pullback over the next month or so would be in keeping with historical trends.

However, I thought I'd dive a bit further into the cycle work to see if the presidential election cycle has anything meaningful to offer. In our research, we took a look at how the market -- SPDR S&P 500 (SPY) -- acted in all the elections since 1900. We looked at cases where the incumbent party won the election and when the incumbent party lost.

We also reviewed the outcomes of the elections relative to the performance of the stock market prior to the election and compared all of the above to the current election cycle.

The good news is that the Dow Jones Industrial Average ($INDU) tends to produce solid gains during election years. In a typical cycle, stocks go sideways in the first quarter of the year, rally into May, correct into July, rebound strongly into September, pull back a bit into early October, and then enjoy the usual year-end rally.

However, when the incumbent party loses the election, the early year rally tends to fizzle quickly and the summer correction is more pronounced. The decline in September and early October tends to last longer and be much more severe, and the typical year-end rally never really gets going, leaving the Dow lower for the year.

In looking more closely at the September-October period of each cycle, it becomes clear that the stock market tends to favor an outcome that doesn't change things politically. While there is usually a pullback during September in a presidential cycle -- regardless of which party wins -- when the incumbents win the pullback tends to be much shorter and far less intense than when the incumbent loses.

In fact, history shows that if the incumbent party winds up retaining the White House, the September declines end before the end of the month, giving way to a meaningful rally that lasts into early December.

There is one additional bit of historical data worth considering before investors place their bets on the outcome of the election. Remember that the stock market hates uncertainty and tends to discount the future.

We found that when the DJIA has sported gains of more than 8.5% through the end of August, the incumbent party has mostly won the election. In fact, since 1900, when the DJIA has sported a gain of 8.6% or more through late August, the incumbent has lost on only three occasions.

With the DJIA currently up nearly 11% year to date, the S&P 500 ($INX) is up almost 16%, small caps -- Russell 2000 Index (IWM) -- are up 15%, and mid caps -- S&P MidCap 400 (MDY) -- sport a gain of just about 15%. The NASDAQ (QQQ) has gained an impressive 24%, thanks in no small part to Apple (AAPL). The stock market would appear to be casting its vote early -- at least from a historical perspective.

So let's review. The recent "breadth thrust buy signal" tells us that stocks have rallied nicely in the months after the signal. But the "cycle composite" suggests that it's time for the market to pull back. Finally, the presidential cycle suggests that the severity of the sloppiness typically seen in September will depend on who wins the election.

If the Democrats retain the White House, any pullback should be short and shallow. But if the Republicans win, stocks may actually suffer into the election.


For more on the State of the Markets, visit FollowMoenning on Twitter: @StateDave

Sep 25, 2012 2:31AM
Obama 2012!  Sorry SRTdriver you lose BIG TIME, you raving  IDIOT!  OMG put a cork in it you obnoxious loudmouth!
Sep 24, 2012 6:25PM
heheh oh you pathetic liberals in the media, you still don't get it do you, it's over for you, you're no longer able to shape the outcomes of anything politcal anymore, your absurd obamazombie brainwashed loyalties to your failed black messiah are so sickening, so blatant, so rooted in racism and convoluted political correctness and so biased that you basically shot your load, they entire nation knows and sees you for what you are, statists, stalinists communist shills for the illegal and amoral obama regime, you protect or make idiotic excuses for his absurd failures, you  lie, contrive or never report truths that would hurt your Failure in Chief, and make up the news, you doctor the Jorge Zimmerman tapes, you call him a White Latino to incite rioting, you bastards live for that shiit!! ,you convict the man without hearing all the facts and it was obvious to everyone except you pigs that travon martin attacked and beat him down to the ground and Jorge had to defend himself.  you doctored Romney interviews, your liars, racist media thugs for lack of better terminology, your sickening loyalties to this black marxist, simply cuz he's black, not on his merits, just his color, obliterated your credibility which you've lost years ago actually, there is no equality in the media that's obvious, so I predict Romney will win in a landslide victory eclipsing that of Reagan/carter, and then you azzwipes can wax poetically at your idiotic round table chats on how America is still racist and divided and whatever nonsense you libs luv to blame things on, barrack hussein obama is the "blue screen of death" for America and we've just about had enough of him and you, have you forgotten the landslide victory of Republicans in the midterm elections? the Scott Walker recall win? numerous Tea Party backed candidates elected? democraps after democraps getting arrested, caught cheating, lying, setting up fake charaties to siphon monies from the very constituents they claim to represent and care about "be for the poor" and those sons of filthy whores are making them such!!! you think Americans aren't noticing this insanity???? you think we won't make our presence known aat the polls??? nuff said
Sep 25, 2012 11:07AM
The only thing a rising stock market tells us is Bernake is full speed ahead with QE3 ! If  Communist obama wins you will see a crash like no other in the history of stock markets. Anyone that is an investor better pray that obama loses or it will be a gloom America for many more years!
Sep 25, 2012 10:12AM
If Obama wins I think just the opposite will happen, the market will crash because 4 more years of Obama and this country will be a third world country. We have never had a president so bent on destroying this country as Obama is so normal rules do not apply.
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