Elections are important to the markets. After all, the Presidential election seems to lie at the heart of the Presidential cycle, a four year pattern technical analysts identified years ago that continues to provide useful insights to this day.
But, as Warren Buffett notes, “If you mix politics and investing, you’re making a big mistake.” It’s important for investors to forget how they feel about politics and look at the market data to make decisions.
The facts related to the election are now bullish. This is only one factor that investors should consider when making trading decisions but the election is important to consider.
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Data Related to the Election
Looking at the data, MarketWatch recently highlighted how bullish the time after the election is:
“Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one. Every single one. That’s 18 for 18. Even though we’ve had every possible political combination in the past 72 years.
Republican president with Democratic Congress. Democratic president with Republican Congress. Republican president and Congress. Democratic president and Congress.
Since 1946, stocks have risen an average of 17% in the year after a midterm. And if you measure from the yearly midterm lows, the results are even better. From their lows, stocks jumped an average of 32% over the next 12 months.
For perspective, that’s more than double the average performance for stocks in all years. We’re also entering the third year of a presidential term, which is historically the strongest year for stocks.”
The chart below shows performance of stocks in the third year of a Presidential term. This is the Presidential cycle and the upcoming year is the most bullish based on history.
This data, as noted above, considers market performance based on “every possible political combination in the past 72 years.
Republican president with Democratic Congress. Democratic president with Republican Congress. Republican president and Congress. Democratic president and Congress.”
But, some combinations are more bullish than others. The next chart breaks out market performance by combination.
Source: LPL Research
After the recent election, we have a Republican President and Congress is split. As the chart above shows, this is the best possible outcome with a Republican President. That could be because there is now a need for negotiations to pass legislation.
While gridlock is possible, the Democrats who control the House of Representatives are likely to want to seek reelection in 2020 on a record of accomplishments. Likewise, the occupant of the White House will also want to point to accomplishments.
Some analysts speculate infrastructure is an area where compromise is possible. Democrats will seek projects that meet their goals and Republicans will seek projects that create jobs. One example could be that alternative power plants get built, or roads get expanded.
Possibilities for compromise could boost the economy and the stock market.
More Bullish Factors to Consider
Seasonal factors offer additional reasons for traders to have a bullish outlook. Seasonal factors are often looked at in terms of days or years. The presidential cycle is an example of a seasonal strategy based on years. Holiday strategies can be viewed in terms of daily tendencies.
But, there are other ways to look at the calendar and seasonal tendencies. Among those techniques is to use quarterly data, looking at performance in each of the four three month periods in the year. This provides a more detailed look at the Presidential cycle, for example.
Analysts at LPL Research note, “the fourth quarter of a midterm year historically have been the best quarter of the four-year presidential cycle. Not to be out done, the next two quarters have been quite strong as well.”
Source: LPL Research
Now, at least a few investors may be wondering if the recent sell off in the stock market will overwhelm the bullish factors associated with the election. This is definitely possible but the market has declined in October many times. Research finds rebounds after October sell offs are common.
History actually shows a significant rebound in stocks is likely. Analysts found that since 1950 in mid-term election years, the S&P 500 gained more than 10% on average from the October low close until the end of the year.
Source: LPL Research
These factors are all bullish, at least to some degree. But, traders must also consider fundamental factors which are overvalued and potentially a bearish omen for stocks. It is also possible that the age of the bull market and the economic expansion could be pointing to a bear market and recession.
This is, in a nutshell, the problem of trading. Some traders will use a weight of the evidence approach and view the factors individually before integrating the factors into a comprehensive view. This could be done with a simple approach.
For example, seasonals are bullish and the Presidential cycle is bullish. But fundamental and economic factors are bearish. Technicals are split. This could be an environment where traders find selective buying of stocks and put options to be profitable.
Selected stocks offer upside potential if the bull market continues. Put options should increase in value if the market declines. These trades could offset the losses of long positions in stocks or they could even deliver a profit if they are a large enough portion of a trader’s portfolio.
The election and calendar driven seasonal tendencies are factors that a trader could consider. But, using specialized analysis like this will require time and commitment to use.
Many individuals discover that they are not able to complete the required amount of research because that can take an extended amount of time and they have other personal and professional commitments competing for their time.
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