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Trading the Election Cycle

Trading the Election Cycle

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Published by: stummel6636 on Jul 30, 2012
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07/30/2012

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Trading the Election Cycle 
What if someone told you it was possible to capture the lion’s share of Dow gains by only being invested and at risk in the market for a little more than half the time?
Would it surprise you to learn that governments have developed an uncanny knack at kicking the economy intooverdrive leading up to elections? If it wasn’t clear how self-focused our elected officials could be regardingtheir own political well-being before the debt ceiling debate, it should be crystal clear now. The debate wasfurther confirmation that politicians will do whatever it takes, no matter what the cost, to get re-elected.But luckily for them (if not for us), voters have short memories and the self-serving theatrics on Capital Hill willlikely be forgotten by the time the next election rolls around. Such events are little more than expensive side-shows in the overall political landscape with roots dating back at least two centuries.
Presidential Push
 According to
The Almanac Investor 
, evidence of the election cycle dates back to the administration of AndrewJackson in 1833. Over the next 172 years, Dow Jones Industrial Average returns in the 24 months pre-electiondwarfed those in the two post election years by a factor of more than three to one – 745.9% versus 227.6%.Figure 1 – Composite of 29 Presidential or Election Cycles showing typical index performance for the four election years. Courtesy of TheChartStore.com “The “making of presidents” is accompanied by an unsubtle manipulation of the economy. Incumbent
 
Page 1 of 7Thursday, September 15, 2011 AOL: Richfricke
 
administrations are duty-bound to retain the reins of power. Subsequently, the “piper must be paid,” producingwhat we have coined the “Post-Presidential Year Syndrome,” write
 Almanac Investor 
authors Jeff Hirsch andTaylor Brown. According to Edward R. Tufte in his book
Political Control of the Economy 
, pre-election stimulative fiscalmeasures designed to provide a sense of prosperity and therefore greater voter enthusiasm come electiontime, have typically included methods to increase per capita disposable income, increases in federal budgetdeficits, government spending increases, additional social security benefits, interest rate reductions andaccelerated projected funding programs.But the downside of the two-year of pre-election party is the two lean years in which the “piper must be paid.”It’s no coincidence that recessions have often occurred then. Recent examples include the bear markets in2001-2, 1997, 1993, 1981, 1977 and 1973 which was the start of the worst bear market since 1929.Fast forward to today and the evidence is clear. Before the 2008 election, the Republicans introduced a host of stimulus programs such as the Troubled Asset Relief Program (TARP) and began to dramatically increase themoney in circulation (Adjusted Monetary Base) in mid-2008 as the financial crisis unfolded before a federalelection.Over the years, election stimulus programs have had an incredible impact on stocks. For example in 43 post-election years between 1833 and 2001, the Dow generated a total 67.9% return compared to an impressive457.6% return for the Dow for pre-election years according to the Almanac Investor. That works out to a ratio of almost seven to one!Figure 2 – Chart showing typical performance for the Dow during the mid-term year over the 81-year periodfrom January 1928 to December 31, 2009. Chart courtesy of EquityClock.com 
 
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 Figure 3 – Chart showing typical performance for the Dow during the pre-election year over the 81-year periodto December 31, 2009. Chart courtesy of EquityClock.com 
 
Page 3 of 7Thursday, September 15, 2011 AOL: Richfricke

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