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Weekly Market Commentary 10.29.2012

Weekly Market Commentary 10.29.2012

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Published by: monarchadvisorygroup on Oct 31, 2012
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Member FINRA/SIPCPage 1 of 3
Jeffrey Kleintop, CFA
Chief Market StrategistLPL Financial
LPL FINANCIAL RESEARCH
Weekly Market Commentary
October 29, 2012
Post-Election Apprehension
Highlights
Between the election and the end ofthe year, tighter races have seen biggermoves and wider swings in the S&P 500.In addition, lame duck legislative sessionsduring presidential election years haveresulted in a decline in the S&P 500.While we expect progress to be mademitigating the impact of the fiscal cliff in thisyear’s lame duck session, progress alonedoes not mean market gains are assured, ashistory attests.The negotiations themselves, coming onthe heels of hard-fought election battles,can drive wide market swings and result inmodest losses.
Our view remains that a closely divided and hard-fought election will befollowed by more fighting in a divisive and bitter lame duck session inCongress, resulting in higher volatility and a potential pullback for the stockmarket. As the race continues to tighten, the market shed -3.3% during lastseven trading days (October 18 26).In general, the post-election environment has not been a bad one for stocks.The S&P 500 has posted gains two-thirds of the time from the electionthrough year-end. This is similar to the performance of the markets during anyother roughly two-month period. However, digging deeper into the markets’performance during elections that have similarities to the current one mayshed insight into how the markets may perform in the coming months.While the S&P 500 has posted gains, on average, between the election andthe end of the year, the tighter races saw bigger moves and wider swings,as you can see inFigure 1(next page). Nearly half of the time (four of thepast nine elections), the ultimate loser of the election was ahead in theGallup polls as of late October, highlighting a very close race. An exceptioncan be seen in 2008. While 2008 was still relatively close, it was not as tightas the current race. Volatility was tremendous, as the financial crisis unfoldedand stocks plunged as the United States fell into a deep recession — allunrelated to the election. The average percentage post-election changein the stock market (in either direction) for the close races in 1976, 1980(though the election turned out to be an upset win for Reagan), 2000, and2004 was 6.4%. This was triple the 2.2% average change in those electionsthat were not as close, when excluding 2008. The swing from high to lowin the S&P 500 was twice as wide following the close elections than theothers, excluding 2008. When including 2008, the tight races still had a muchlarger average move, but only slightly greater average swings.Drilling further down to look at those presidential election years that had lameduck sessions in Congress also may offer insight, since Congress has a bigbudget challenge ahead in this year’s lame duck session. These years havenot been good for stocks. Excluding 2008 from the four lame duck legislativesessions during presidential election years since 1948, the S&P 500 wasdown in each of the lame duck sessions that took place in 1980, 2000, and2004. The losses were modest ranging from less than 1% to nearly 4%.
 
WEEKLY MARKET COMMENTARY
LPL Financial Member FINRA/SIPC Page 2 of 3
Importantly, these market losses took place despite important legislativeaccomplishments in those lame duck sessions. The Congressional ResearchService in their 2009 publication entitled
Lame Duck Sessions of Congress 1935-2008 
recount the accomplishments during these sessions:
 
1980 —
During the lame duck session, from November 12 to December16, 1980, Congress completed action on many of the issues that had beenleft unfinished in the regular session, including the following: a budgetresolution and a budget reconciliation measure; five regular appropriationsbills, although one was subsequently vetoed; and a second continuingresolution was approved to continue funding for other parts of thegovernment. Non-budget-related actions included an Alaska lands bill anda “superfund” bill to help clean up chemical contamination, a measureextending general revenue sharing for three years, a measure that madedisposal of low-level nuclear waste a state responsibility, changes tomilitary pay and benefits, and authority for the president to call 100,000military reservists to active duty without declaring a national emergency.
2000 —
The House returned on November 13 and the Senate a day later;they faced a still-undecided presidential election yet faced substantial budgetdecisions. They approved a short-term continuing resolution and then agreedto a further recess until December 5. After reconvening on December 5,Congress agreed to a series of five short-term continuing resolutions, whilefinal decisions on the remaining appropriations were being negotiated.During this sequence of events, the Senate recessed on December 11 afterproviding, by unanimous consent, that when the fourth in this series ofcontinuing resolutions was received from the House, it would automaticallybe deemed passed in the Senate. Finally, on December 15, both chamberscompleted action on fiscal year 2001 appropriations measures by agreeingto the conference report on the omnibus appropriations bill. In addition,
1
Close Races Lead to Volatility
The Closer to Election, the Loser was Ahead in Gallup Poll, and the Bigger the Swings 
Election YearWinnerLoserLoser’s LastLead in GallupPollS&P 500Post-ElectionChangeS&P 500Post-ElectionRange in %
1976CarterFordOctober 306.2%9.2%1980ReaganCarterOctober 264.2%10.0%1984ReaganMondale -1.1%4.6%1988H.W. BushDukakisAugust 71.5%6.0%1992ClintonH.W. BushJuly 84.3%5.5%1996ClintonDole 4.10%6.3%2000W. BushGoreOctober 23-7.6%11.5%2004W. BushKerryOctober 317.6%7.6%2008ObamaMcCainSept 1524.8%24.8%Average for Close Races (1976, 1980, 2000, 2004)
6.4%9.6%
Average for Other Races ex-2008
2.2%4.5%
Source: LPL Financial, Bloomberg Data, Gallup 10/29/12

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