Right on! But be careful out there as sustained September rallies are a rare and beautiful thing!!!
By Tomi Kilgore, CBS.MarketWatch.com Last Update: 9:40 PM ET Sept. 7, 2004
NEW YORK (CBS.MW) -- Over the next two months, whoever wins November's presidential election may be less important to U.S. investors than the margin of victory come Election Day.
With the close of the Republican National convention in New York last week, the presidential race entered its final leg. And generally, that's a good time for the stock market.
Contrary to its standing as the worst month for stocks, September produced a positive average return for the S&P 500 Index in presidential-election years since 1952. Add in October, and the two-month return also beats the average September-October period.
Yet returns were vastly different based on the election results: Investors bid up stocks when they sensed a landslide, and shied away when the outcome appeared in doubt.
In the 13 presidential-election years since 1952, the S&P 500 rose an average 2.2 percent in the two months before the 10 elections where the winner reaped two-thirds or more of electoral votes. Prior to the three with narrower margins, the index fell 4 percent on average.
"The weakness likely reflects an undecided electorate, and a group of traders preoccupied with who will win the election," said Jeffrey Hirsch, editor of the Stock Trader's Almanac. "Markets don't like uncertainty."
Split decisions
September is historically the weakest month for stocks. The S&P 500 Index ($SPX: news, chart, profile) fell an average of 0.8 percent in September since 1950, the Stock Traders Almanac said. Yet it gained an average of 0.6 percent during the month in the presidential-election years.
If you add in October, the index rose a scant 0.1 percent on average in the September-October period. But it advanced an average of 0.8 percent in those two months prior to presidential elections.
The caveat is the September-October effect only produced gains as voters embraced a clear-cut favorite. That does not bode well for this year, since the Bush-Kerry race appears headed for a tight finish.
Consider the market's performance during the three hotly contested elections since 1952:
In the two months before the November 2000 election -- in which George W. Bush lost the popular vote to Al Gore while eking out 50.5 percent of electoral votes - the S&P 500 fell 5.8 percent.
When Jimmy Carter beat Gerald Ford in 1976 with 55 percent of electoral votes, the S&P 500 was virtually unchanged during the September-October period.
In 1960, when John F. Kennedy defeated Richard Nixon with 58 percent of the electoral votes, the S&P 500 fell 6.3 percent in the two months prior to the election. Voting with their pocketbook
The Stock Trader's Almanac, which analyzed presidential-election results and stock-market performance back to 1900, says the direction of stocks may reveal more about who wins the election than the other way around.
Of the 16 times since 1900 when the incumbent beat the challenger, the Dow Jones Industrials Average ($INDU: news, chart, profile) rose 14 times for an 8.6 percent average gain in the last convention-to-election period. Of the 10 times the incumbent failed to retain power, however, the Dow fell seven times.
The Almanac also said the Dow rose 16 percent on average for the calendar year when the incumbent retained power, vs. a 1.4 percent average loss when they were ousted.
"Presidential elections every four years have a profound impact on the economy and the stock market," the Almanac says. "Wars, recessions and bear markets tend to start or occur in the first half of the term; prosperous times and bull markets, in the latter half."
A twist on what Kennedy said in his 1961 inaugural address might go: "Ask not what the election outcome might do for stocks, but what stocks' performance might say about the election."
If that's that case, forget party politics and focus on the prospect of a clear and convincing winner emerging. For unless President George Bush or Sen. John Kerry seizes a commanding lead and holds it through the polling, odds favor an overcast two-month stretch ahead.