Indicator of the Week: History Suggests the 'Trump Rally' Could Have Legs

Stocks have had quite a rally since the November election. The S&P 500 Index (SPX) is up about 6% since then. This week, I will look at how the current rally compares to other post-election rallies. Also, is the recent price action any indicator for what might happen after the inauguration? Is the rally an omen for the rest of the year or the next four years? Or does it indicate expectations are getting a little too hopeful for the next administration, and the gains have already been had? 

Stocks Election to Inauguration: In 1937 (after the 1936 election), Inauguration Day was moved from March 4 to Jan. 20. I went back to that point to see how the SPX has normally performed between the election through inauguration. For comparison, I looked at non-election years from the second Tuesday in November through Jan. 20 of the next year (the comparable time frame in election years), as well as anytime 50-day returns (on average, there have been about 50 trading days between a presidential election and Inauguration Day).  

Per the chart below, stocks have tended to underperform from the election until the inauguration, at least by the S&P's average return of 0.44%. By other metrics, like percent positive, the returns have not been so bad. The reason for the underperformance is that the average positive of 4.25% is lower than the other two columns, and the average loss of 6.64% is bigger (in magnitude) than the other two columns. So, the sharp rally we've seen so far this year is out of the ordinary.

The chart below shows the performance of the S&P 500 since the recent election, and compares it to the average path of the index following past elections going back to 1936. I also show how the index has done when a new party takes control of the White House. Stocks right away surged after this past Election Day, but have been pretty flat over the last month. Interestingly, stocks usually do poorly immediately following the election, and then trudge higher to a small gain before the inauguration. The typical return after a new party takes power is pretty close to the average anytime return, except that it declines in the last few weeks before inauguration to a small loss overall. I guess it is fitting that stocks are acting differently than normal, since the last election was different than normal.

Going Forward: The tables below show how the SPX has done after Inauguration Day. The first table, summarizing the six months after Jan. 20, shows stocks have tended to struggle after there is a change of party in the White House. The S&P 500 has averaged a six-month gain of 0.3% in these instances, with just 37.5% of the returns positive. The second table shows how the S&P 500 has done for the rest of the year. Again, a change in party has not typically been good for stocks in the first year. One thing to note is that stocks show less volatility than usual in the six months after an election when a new party takes power. However, for the full year, there is more volatility in election years, as measured by standard deviation. Evidently, the volatility comes in the second half of the year.

So, what does a rally mean after the election into Inauguration Day, like we saw this year? The tables below are encouraging. The performance of the SPX immediately after the election has been a pretty good indicator for what has happened after the inauguration. When the index has been up by at least 4% from Election Day through Jan. 20, it has averaged a gain of 6.36% over the next six months, and 9.93% over the remainder of the year. This easily outperforms the other scenarios. When the index has been negative after elections, it has done poorly over the next six months and a year.        

Finally, can stocks' returns from the election to inauguration tell us anything about the next four years? Probably not, but let's look at the numbers for fun. Again, when stocks have done well right after an election, the next four years have done pretty well, too. The SPX has a double-digit annualized average return when the index is up at least 4% after the election. Five of the six returns have been positive. Unlike the tables above, though, when stocks are down post-election, you do not see the poor returns going forward for the next four years like you do in the next six months to a year.

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