Indicator of the Week: Election Day
By Rocky White, Senior Quantitative Analyst
Foreword: This Tuesday, U.S. citizens will flood the polls to elect our next president. Hopefully the markets react better this year than they did in 2008. Markets were in a turbulent time then, with the Dow falling 14% in October before the election. The Wednesday after President Obama was elected, the Dow fell over 5% in a single day. Below is some historical data on how equities have performed during election time.
Election Day: Going all the way back to 1900, this will be the 29th presidential election. Below, I summarize the Dow returns on the day after the elections, and compare that to a typical day for the market. You can see the day after the election averages a loss, and is up less than half the time (maybe we don't believe in the guys getting elected?). One thing I was curious about was the volatility on the next day. I assumed Election Days were more volatile, given the uncertainty of elections. Sure enough, using standard deviation of the returns, the day after Election Day is significantly more volatile than a normal day by about 80% (1.99% vs. 1.14%).
Republicans have the reputation of being more business-friendly than Democrats. The data shows investors agree with this thinking. The table below shows how the Dow does on the day after an election, depending on which party wins the presidency. When a Democrat took the White House, the Dow fell an average of 0.93%, and was positive just 31% of the time. When the Republicans won, it's gained an average of 0.64%, and was positive 60% of the time.
The first two columns of the table below show how the Dow does depending on whether or not the controlling party stays in power. Historically, the average return is better when whomever controls the White House stays there (+0.29% vs. -0.67%). The percentages of positive returns, though, are not much different. In the 13 times the incumbent was re-elected, the Dow had an average gain but was positive just 38% of the time. The incumbent has lost only four times, with two returns positive and two negative.
The next table is relevant to the current election. It looks specifically at when a Democrat incumbent is running for re-election. Both scenarios are pretty bearish, with only three of 10 positive when you combine the returns. Both scenarios show the Dow losing points, on average.
Election Week: While the day after an election is typically more bearish than usual, surprisingly, the trading week is very bullish.
So, how is the entire week so positive when the day after the election is so negative? The table below shows every other day during the week is positive at least half the time, and averages a gain higher than the typical market day, which averages a gain of 0.03% (shown in the first table). The week typically starts off great, with Monday averaging a 0.68% return and positive an impressive 75% of the time. Note that markets were closed on Election Day until 1984, so we can only measure the past seven elections. The day after the election, as we've discussed, is not a good day for the market. Thursday of election week is then usually a very strong day, and Friday returns have resembled a typical market day.
This Week's Key Events: Wall Street Watches the Polls
Schaeffer's Editorial Staff
Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
And now a sector of note...
We continue to see evidence that the housing sector is in recovery mode. Most recently, U.S. home prices reached their loftiest level since September 2010 in August, with the S&P/Case-Shiller 20-city index edging 0.9% higher from the month prior. Prices are up 2% from the year-ago period, marking the largest such gain since July 2010, and exceeding expectations for a rise of 1.9%. In addition, we've seen an impressive 11.3% annual jump in existing home prices, and the fastest growth in new home sales we've seen since April 2010. In fact, the National Association of Realtors (NAR) observed that the primary deterrent for many home buyers, at this point, is actually an "inventory shortage." Plus, the Fed's plan to buy mortgage-backed securities as part of its QE3 endeavor is even more bullish for homebuilders. Despite the improving fundamentals, some sell-side analysts are getting nervous. Since late September, Barclays, Susquehanna, and MKM Partners have all downgraded the housing sector, and hedge fund manager Whitney Tilson is now said to be betting against the group. This downbeat backdrop is encouraging for contrarian investors, as it underscores our theory that the euphoria evident at tops isn't yet in place. From a technical standpoint, the SPDR S&P Homebuilders ETF (XHB) took out the $23 level (the half-high of its inception price) back in August, which we view as bullish. What's more, the ETF on Friday toppled short-term resistance in the $26 neighborhood -- which roughly coincides with a 50% year-to-date return for the fund -- jumping into territory not charted since August 2007. Some of our preferred names include KB Home (KBH), PulteGroup (PHM), D.R. Horton (DHI), Toll Brothers (TOL), Lennar (LEN), and Meritage Homes (MTH), due to a combination of solid price action and persistent skepticism from Wall Street.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
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