Lobbying for gains over the election cycle

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E head towards a Mitt Romney versus Barack Obama showdown in November, what does this year’s presidential election mean for the stock market? Can we look at past election cycle trends to gain an advantage in this cycle?

As you can see from the chart on the right, based on cumulative data from the last 100 years, in an election year, the performance of the Dow Jones Index tends to see a peak around the November election. And over the four-year cycle, there is also a recurring pattern. The first year following an election typically sees relatively weak performance from the US indices. This year typically sees the weakest performance of the cycle. The mid-term election year sees another 12 months of poor market performance, with market bottoms occurring more in this year than any other. In the year before an election, the markets show their strongest performance of the cycle, with performance plateauing over the election year.

Of course, it is quite easy to shoot holes through election cycle theories. Over the last century, we have only seen 27 US presidential elections. On top of this, since 1948 there have only been 15 different terms. Hardly a data set of Mariana Trench-like depth. On top of this, the markets are driven by thousands of different variables, and with enough data mining and by cropping the charts over just the right period, you can bend any set of data to match a prejudiced hypothesis. Just take a look at some of the attempts to link short-term sterling-dollar moves last night to the fortunes of 11 England players kicking a pig skin around a field in Ukraine.

But whether or not you agree that the available data shows conclusive evidence that the Dow can be driven by the election cycle, it is difficult to refute that incumbent presidents and political parties will often manipulate fiscal policy. Republicans are quick to forget that it was George W. Bush that signed into law the Troubled Asset Relief Program (Tarp), that used taxpayer money to buy assets and equity to prop up failed financial institutions, following the fallout from the sub-prime crisis in 2008. Given the GOP’s ideological opposition to government intervention in the markets, would he have behaved differently in a non-election year? We don’t know. But the forthcoming election almost certainly made the decision to artificially reinflate the markets a lot easier for Bush Junior.

Bailouts, stagnating job growth and an unscathed public deficit – the US economy hasn’t seen a huge amount of the much promised hope and change since the start of this particular election cycle. Democrat president Obama may not have to deal with the same threat of imploding financial institutions as his Republican predecessor, but the constantly disappointing non-farm payroll figures do not bode well. Rather than trying to reinflate the banking sector, Democrat votes will likely be driven by resurgent private sector jobs. And those looking at the run up to the election should look to piggy-back any attempts – monetary or otherwise – to give these numbers a kick, just in time for when the American public hits the polling booths.