Presidential Elections Since 1896: Does the
Market Express an Opinion?
November 11, 2012
by Doug Short
of Advisor Perspectives
In previous commentaries this week I've been reporting on the historical patterns of pre- and postelection market behavior. Here is a wrap-up featuring the 30 presidential elections during the 116-year
history of the Dow with some focus on outlier election weeks.
As an opening gambit, I'd like to share a bit of feedback on my latest World Markets Weekend Review.
I commented that "The US presidential election took center stage of the world news media, and
obviously the reelection of Obama was not what the market wanted. The S&P 500 dropped 2.37%
the day after the election. For the week it fell 2.43% -- the worst weekly performance since late May."
I received an email suggesting that my comment "diverge[d] into new territory with a subtle, but
obvious, dig at our presidential election. The writer closed the email with the speculation that "the
reelection of President Obama was not what Doug Short wanted."
His email included the following observation:
For someone who relishes statistics and multivariate analysis, attributing the primary cause of a
short term market response to Obama's reelection seems like a stretch. If we go back to January
2009 when Obama was inaugurated, the S&P and Dow have shown significant gains (48% and
42%). I could characterize that longer term behavior as a positive response to fiscal and economic
policies proposed by this administration. But it is probably more complex than that. Certainly the
policies established by this administration have not inhibited the economy and markets to a partial,
but successful recovery.
As for policy, mine is to remain objective, all the more so in matters that touch on politics. The market's
performance in the years following Obama's 2008 win was an unknown and thus irrelevant to the
market's behavior in election week 2008. Similarly, the initial post-election reaction of the Dow and
S&P 500 to last week's election is just that -- a reaction. It was an immediate response to an outcome,
one the market didn't like. Will the market have second thoughts next week? Perhaps. But that's
outside the focus of this commentary.
Presidential Elections and the Dow Sorted by Four-Day Performance
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Below is an updated table illustrating the behavior of the Dow during the 30 election weeks stretching
back to 1896.
Please note the "4-Days" column above (on which the table is sorted) and check out the 2008 election
cited by my email correspondent. It's the second row above the averages at the bottom.
Someone who uses phrases like "multivariate analysis" will perhaps
appreciate the significance of the fact that the 4.03% Dow decline in
election week 2008 was nearly two standard deviations below all
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29,000-plus rolling 4-day Dow performances since May 1896. The only
election week with a worse Dow decline was Truman's historic upset of
Dewey. There are few visitors to this website who aren't familiar with
the photo of Truman holding up an early edition of the Chicago Tribune
with the erroneous headline DEWEY DEFEATS TRUMAN (which,
incidentally, is reported to be the most sought after newspaper of all
time).
Note that I included the 4th and 5th standard deviation boundaries
above the mean in the table. Why? The first row in the Dow table above is by far the most conspicuous
outlier. The 10.56% four-day gain in FDR's first election week is smack in the middle between the 4th
and 5th deviation boundaries.
Now check out the "Wednesday" column in the table above. Of all 30
post-election Wednesdays since the inception of the Dow, the one
following Obama's 2008 win was the absolute worst: a 5.05% collapse.
As we can see from the second right-hand table, that's four standard
deviations below the mean Dow daily performance. Interestingly
enough, the 4th standard deviation below the Dow daily mean starts at
minus 4.59%, which, incidentally, is very close to what FDR got on
post-election Wednesday in that amazing 1932 election week.
As for President Obama's first presidential election, the economy was
indeed going through some traumatic times in the fall of 2008. The
Lehmann Brothers bankruptcy occurred just seven weeks earlier. But I
believe that the market's behavior immediately following the 2008
election was primarily focused on one thing: The fact that Democratic
candidate Obama beat Republican McCain, thus terminating eight years of GOP control of the White
House.
What about the 2012 election? Was the post-election market expressing an opinion about the
outcome? Here is a 15-minute chart of the Dow for last week. What do you think?
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Postscript
For anyone interested in further exploration of the historical data and to help us see table numbers in
the larger context, here is the chronological version of the chart above.
Presidential Elections and the Dow: Chronological Sequence
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And here are some basic facts:
Since its inception in 1896, Dow daily closes have been 52.2% positive, 47.2% negative
and 0.6% unchanged.
The average daily change, to three decimals, is 0.026%.
The average of all four-day moving averages is 0.106%.
How do the presidential numbers in the table compare? Of the 120 days, 58.3% have been positive,
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41.2% have been negative. There were no flat finishes. The average daily gain is 0.33%. Now please
pay attention: That's 12.5 times larger than the mean Dow daily gain. It's no overstatement to say that
election week tends toward extremes of daily volatility.
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