History Says To Be Careful At The End Of Election Years

My friend Jeff Hirsch, Author of the annual Stock Traders Almanac, put out a friendly reminder last week about the final stages of Election years. Historically, Q4 the year of an election and Q1 of the following year represent the second worst two-quarter combination of the entire 4-year cycle.

Jeff goes on:

"As the market climbs higher in the latter stages of this election year I am reminded of some ominous points in the last secular bear market that ran from 1966 to 1982. The market was rallying in late 1972 just before it peaked in early January 1973 at the beginning of that nasty 2-year bear. A bull market high was reached in September 1976. The market soured as Carter was likely to be elected and rallied briefly after he won and the incumbent was ousted, but then fell into a deeper decline right after New Year’s Day for the entire year of 1977. In 1981, the market topped in April as Regan began implementing his tax cutting and deficit reduction initiatives and remained in decline until the end of the secular bear in August 1982."

Below are the quarterly returns for the Dow Jones Industrial Average, S&P500, and Nasdaq Composite throughout the Presidential Cycle. Notice the consistent negative returns in the first quarter of post-election years. And also take note of the below average returns in Q4 of election years when compared to Q4 of non-election years. This is precisely the period that we've entered into this week.

As usual, we don't take one data point and make portfolio altering decisions based on it. But as Mark Twain said, "History does not repeat itself, but it does rhyme." Just something to keep in mind.

Sources:

Q4 Not So Magical In Election Years (StockTradersAlmanac)

Stock Traders Almanac 2012 (13)

Tags: $COMPQ $DJIA $SPX $QQQ $SPY