Basis Points: A View From the Hills

Campaigns and Capital Gains

December 2015

Campaigns and Capital Gains

by admin on December 15, 2015

Moody Analytics began using a complicated model that looks at the overall economic health and political affiliation of America on a state by state basis to predict the Presidential election winner. As forecasting goes, the model has a fairly short but perfect record. The model has correctly predicted the outcome of each of the last nine presidential elections.

In 2012, the model really flexed its muscle by correctly predicting not only the outcome, but the exact Electoral College vote. If the model maintains its 100% accuracy rating, the Democrats will be raising a glass to the next President in November 2016. Regardless of the outcome, the model predicts an extremely close race, with the usual suspects of Florida, Ohio, Iowa, and North Carolina capturing most of the election night drama.

2016-Voting-Forecast

Another forecasting phenomenon has repeated itself with remarkable regularity over the past 75 years. In every pre-election year (which we are in now) since 1939, the stock market (DJIA) has ended the year with a gain. The average annual stock market gain during those last 18 pre-election years is over 10%. No other year in the election cycle comes close to matching that performance.

Election-Stock-Market-Gains

The prevailing theory behind this phenomenon is that markets prosper during periods of relatively low taxes and stable government policies. Ahead of an election, politicians from both parties tend to focus on a more pro-business agenda. Members of both parties along with the more fickle independent voters become energized and enfranchised during pre-election years with the hope of their candidate either continuing on or becoming the next President.

Another component of the possible outperformance is the market’s preference for stability. Post-Election years are fraught with potential course corrections as the newly elected President works on their first 100 day agenda.

Mid-Term years tend to reflect a type of voter referendum on the policies of the day and typically end up with the sitting President dealing with increased opposition in Congress. By the third year of the term, political change within the current structure is easier to predict. That along with the pre-election promises of better days ahead if you vote for me, seem to have a hypnotic effect on investors.

Exception to the Rule – 2015

Every great rule has an exception and 2015 failed to follow election or stock market history. A huge field of Republican candidates has everyone scratching their heads as to who will eventually win out. The Democratic field has a clear front-runner with little incentive to rock the boat and a clear advantage in delegates (via super delegates already pledged) before a single vote has been cast. Couple that with the recently avoided government shutdown, China slow down, and oil price collapse and 2015 had more than its share of political uncertainty to deal with.

Outside of the political landscape the world is still grappling with the repercussions of the financial crisis, global terrorism, and a host of other issues stemming from advances in science and healthcare. So maybe, just maybe, this time it really is different and the trends of the past 75 years are obsolete.

While this may indeed be the case, it is worth remembering that markets are moved by people and people have patterns. As individuals we would like to think of ourselves as unique as a snowflake and entirely unpredictable. The Moody Analytics model and the last 75 years of stock market data paint a decidedly different picture.

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Moody Analytics began using a complicated model that looks at the overall economic health and political affiliation of America on a state by state basis to predict the Presidential election winner. As forecasting goes, the model has a fairly short but perfect record. The model has correctly predicted the outcome of each of the last…

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