Indicator of the Week: 2 Reasons Investors Should Root for Clinton

With one week until Election Day, it's all that's on everyone's mind. So, this week I'll take an in-depth look at how the market has historically performed heading into presidential elections, and how it has done after. Hopefully we'll gain some insight into what to expect from stocks for the rest of the year, depending on whether Hillary Clinton or Donald Trump win the White House.

Week Before Election: Looking at Dow Jones Industrial Average (DJIA) returns since 1900, right now would be a good time for a short-term bullish trade. In the five trading days before the presidential election, the Dow has averaged a gain of 1.6% and has been positive almost 80% of the time. The "Non-Election Years" column below is for comparison and shows returns at similar times for non-election years (that is, ending the Tuesday after the first Monday of November).

The thing that stands out to me is the lack of volatility in the five trading days before the election. The standard deviation of returns is lower than other years (1.87% vs. 3.00%). More good news is that the downside volatility is especially low, evidenced by the low average negative return of just 0.76%.

In the chart below I show the typical path taken in the five days before Election Day. The chart shows that previously, the two days before the election (Monday and Tuesday) have been especially bullish for the Dow.

Rest of Year: This table looks at how the Dow has performed the rest of the year after Election Day. Election years are slightly bearish compared to non-election years. The standard deviation of returns is higher in election years compared to non-election years, which makes sense, as the election adds some uncertainty going forward.

This next table looks at Dow returns in presidential election years and summarizes them based on whether the incumbent party wins the White House. It's not very close. Stocks have done significantly better when an incumbent party keeps the White House. In that case, the index averages a gain of 3.22% for the rest of the year, and is positive roughly 67% of the time. When the party in power loses, the index averages a loss of 1.49% through year-end and is positive less than half the time.

Finally, the table below summarizes the annualized four-year returns after each presidential election, depending on whether the Democrat or Republican wins White House. The Dow has had better returns when Democrats win, with an average annualized return of 7.09% vs. 4.18% for Republican terms. Based on the table above and this one below, investors would be better off if Hillary Clinton wins next week.