Elections: Bullish Precedence

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To help determine what historical precedence has to tell us about what might come next after the mid-terms, I turned to Logical Information Machines in Chicago. The answer may surprise you.

First, a definition. Mid-term elections in the United States occur in the middle of a presidential election cycle, in which all of the House of Representatives seats are up for election and a third of the Senate. Historically, the mid-term elections have been trouble for the party of the president elected two years previously, as they typically give up a lot of seats in both chambers. It’s a cycle — love you, hate you, love you, hate you.

There were three exceptions in recent history to this pattern, the most recent of which occurred in 2002, during George W. Bush’s first term, when Republicans gained seats in the House.

So how do stocks tend to do at these junctures? Let’s look at the S&P 500 and the Nasdaq Composite separately, courtesy of LIM analyst Gibbons Burke.

Question 1:
How does the S&P 500 index perform from three days before a mid-term election day and for the next 90 trading days?

Answer:
Looking back over the last 20 occurrences, the index has rallied 17 times by an average of +10.9%. The average of the three declines is -2.7%. Overall return of the 20 instances is +8.8%. If the average result occurs, the S&P 500 will hit 1,287 by Feb. 28, 2011.

Question 2: How about the Nasdaq Composite?

Answer:
Looking back during the last nine occurrences, the Nasdaq has rallied every time by an average of +14.7% during the next 75 days. The average result would the Nasdaq at 2,507 on Feb. 10, 2011. The z stat, balancing standard deviation and the mean to indicate probability, is high at 1.3.

Why would Nasdaq companies do so well in a change of government, if that occurs? I think the main issue is the fact that corporate and household cash levels are so high due to cost uncertainties surrounding taxation and regulation. As uncertainties wane, companies and individuals will become more willing to put money to work. And first beneficiaries on the corporate side are technology, machinery and jobs.

Bottom line: Government change and Fed action are poised to act like heat rays to unthaw money that’s been frozen on the sidelines. Some of that money will go into productive uses, some will go into inflation and some will go into speculation. All three of them will help shareholders. Be ready.

For more insights like this, check out Jon’s daily advisory services Traders Advantage or Strategic Advantage.


Article printed from InvestorPlace Media, https://investorplace.com/2010/11/elections-bullish-precedence/.

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