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Post-Election Market Rally

Who's Best for Your Investments?

Nov 13, 2008 Karen Gibbs

Now that the U.S Presidential elections are complete, there's a theory that's gaining attention. It's called the Presidential Pump.

Historically, after a new president is elected, the economy (and the stock market) improves a bit. Will this time be different?

Why Expect a Post-Election Rally?

Since 1901, U.S. stock markets have, on average, rallied after Presidential elections. Reasons for the rallies range from relief that the outcome is known and the uncertainty has been removed to a belief that the incoming administration will be friendly to business and Wall Street. A sense of relief floods investors and consumers who begin to feel a bit more secure, at least for the next four years. There have been two exceptions to this theory; 1932 and 1960. 2008 is shaping up to be the third exception to the rule.

How Long Does the Post-Election Rally Last?

The post-election rally morphs into a Santa Clause rally, as mutual funds dress up their portfolios to improve end-of-year performance numbers by selling losers and buying winners. The New Year starts with the so-called “January effect”, a rally in anticipation of new money entering the market from Christmas bonuses, IRA deposits and fresh optimism. The first hundred days of a new administration are known as the “honeymoon” and are when the new President shares his vision and sets an agenda to achieve those goals. After that, Congress (and the press) step up their challenge and criticism.

Which Party is Better for the Stock Market?

Conventional wisdom says the Republicans are better for the stock market, perceived as being more pro-business than Democrats. According to Ned Davis Research, conventional wisdom is wrong. Since 1901, the S&P 500 index rose an average of 7.2% under a Democratic administration as compared to 3.2% under a Republican White House. When the Democrats control both the White House and Congress, the S&P averages a 14.7% return versus 7.4% return when Republicans have total control.

Could the Pump Fail this Time?

The financial crisis currently strangling the U.S. economy is the worst since 1932 and is likely to dominate the political and investment landscape for some time to come. Consumer confidence, as measured by the University of Michigan Consumer Sentiment Survey, fell to its lowest level in 24 years as consumers fret over jobs, inflation, housing and the stock market. The gloom and doom gripping the market may negate any possible market rally, despite the dramatic decline in the price of oil.

Keep in mind that while most business contractions last an average of 17 months, as chronicled by the National Bureau of Economic Research, there have been three periods of greater duration: 1909-1919 when the Dow Jones Industrial average was basically flat, 1929 to 1957 when a new high was finally reached, and 1965-1982 where the Dow moved sideways before starting the longest bull run ever. Current conditions don’t augur well for 2008.

The copyright of the article Post-Election Market Rally in Investment is owned by Karen Gibbs. Permission to republish Post-Election Market Rally in print or online must be granted by the author in writing.