Seasonality
Presidential Election Year Cycle:
A fascinating relationship exists between the stock market and the 4 year Presidential election year cycle. If one combines this with month-to-month seasonality, you get the following table:
| S&P 500 Average Monthly Returns by Presidential Election Cycle Year, January, 1949-June, 2007: | ||||||
| | | | | | | |
| Month: | Post-election | Midterm | Pre-election | Election | | Average: |
| Jan | 0.9% | -0.6% | 4.7% | 0.7% | | 1.4% |
| Feb | -1.2% | 1.1% | 0.9% | 0.1% | | 0.2% |
| Mar | -0.2% | 0.4% | 2.3% | 0.8% | | 0.8% |
| Apr | 1.0% | 0.0% | 3.7% | 0.5% | | 1.3% |
| May | 1.5% | -0.5% | 0.1% | 0.1% | | 0.3% |
| Jun | -0.7% | -1.9% | 1.8% | 1.9% | | 0.3% |
| Jul | 1.6% | 0.5% | 1.3% | 0.2% | | 0.9% |
| Aug | -1.8% | -0.4% | 1.4% | 0.9% | | 0.0% |
| Sep | -1.2% | -1.3% | -0.6% | 0.3% | | -0.7% |
| Oct | 0.9% | 3.5% | -1.3% | 0.6% | | 0.9% |
| Nov | 1.4% | 2.9% | 0.8% | 2.1% | | 1.8% |
| Dec | 0.3% | 1.7% | 3.5% | 1.2% | | 1.7% |
| | | | | | | |
| Avg: | 0.2% | 0.4% | 1.5% | 0.8% | | 0.7% |
| | | | | | | |
| Annualized S&P 500 Average Monthly Returns by Presidential Election Cycle Year, January, 1949-June, 2007: | ||||||
| Month: | Post-election | Midterm | Pre-election | Election | | Average: |
| Jan | 11.4% | -6.8% | 73.7% | 8.4% | | 21.7% |
| Feb | -14.0% | 14.1% | 11.2% | 0.6% | | 3.0% |
| Mar | -2.3% | 4.5% | 31.4% | 9.7% | | 10.8% |
| Apr | 12.8% | 0.5% | 53.8% | 6.0% | | 18.3% |
| May | 19.0% | -6.4% | 0.8% | 1.2% | | 3.7% |
| Jun | -8.2% | -20.7% | 24.3% | 25.1% | | 5.1% |
| Jul | 21.0% | 5.5% | 16.8% | 2.1% | | 11.4% |
| Aug | -19.2% | -4.8% | 18.4% | 11.7% | | 1.5% |
| Sep | -13.1% | -14.4% | -7.3% | 3.5% | | -7.8% |
| Oct | 11.5% | 50.3% | -14.9% | 6.8% | | 13.4% |
| Nov | 17.8% | 41.6% | 9.8% | 28.3% | | 24.4% |
| Dec | 3.7% | 21.9% | 51.9% | 15.8% | | 23.3% |
| | | | | | | |
| Avg: | 3.4% | 7.1% | 22.5% | 9.9% | | 10.7% |
What I've done here is broken down the year of the Presidential election year cycle versus the month, showing each month of the 48-month presidential election year cycle. For example, the upper left column is the average January S&P 500 monthly percentage change (0.91%) during post-election years.
| Average Monthly Change in the S&P 500 by Month and Presidential Year, 1945-July 07: | | ||||
| | Pres Yr: | | | | |
| | Post-election | Midterm | Pre-election | Election | All: |
| Month: | 1 | 2 | 3 | 4 | |
| 1 | 0.92% | -0.30% | 4.24% | 0.54% | 1.37% |
| 2 | -1.12% | 1.06% | 0.88% | -0.28% | 0.14% |
| 3 | -0.12% | 0.14% | 1.82% | 0.82% | 0.67% |
| 4 | 1.03% | 0.45% | 3.24% | 0.97% | 1.43% |
| 5 | 1.47% | -0.50% | 0.15% | 0.42% | 0.38% |
| 6 | -0.79% | -1.83% | 1.84% | 2.04% | 0.29% |
| 7 | 1.57% | 0.24% | 1.19% | 1.57% | 0.77% |
| 8 | -1.29% | -0.50% | 1.19% | -1.29% | -0.01% |
| 9 | -0.51% | -1.89% | -0.76% | -0.51% | -0.76% |
| 10 | 1.22% | 3.08% | -1.10% | 1.22% | 1.01% |
| 11 | 1.49% | 2.65% | 0.68% | 1.49% | 1.62% |
| 12 | 0.54% | 1.72% | 3.20% | 0.54% | 1.62% |
| All: | 0.36% | 0.36% | 1.40% | 0.73% | |
Shown here are the average monthly changes in the S&P 500 broken down by month and Presidential election year. Note that pre-election years have been the strongest over the past half-century. The S&P 500 gained 1.40% on average (18.2% annualized) during pre-election years, followed by .73% (9.1% annualized) for election years. Postelection and midterm years are equally bad, returning roughly half (.36%) of the average monthly gain of the entire period. Put another way, the vast majority of a stock investors returns would have occurred during the pre-election and election years with the market treading water (returning only 4.4 percent before dividends) during the other years.
A quick scanning of this table shows that the strongest months of the year fall in the pre-election year (January (4.24%), April (3.24%), and December (3.20%), which also has the fewest number of down months (2: September and October). Almost half of the postelection and midterm years were down on average. Notice also that September is uniformly bad on average, showing an average negative return in all years of the election cycle. What is interesting is that August is also becoming a very weak month with the exception of pre-election years. With the exception of the pre-election year, October seems to have become a stronger month.
Of course, there will be strong Septembers and sell-offs during pre-election years (the crash of 87 occurred during a pre-election year, for example, although the S&P 500 closed up for the year), but in investing, as in poker, returns are very much a function of average probabilities. There is no guarantee that historical seasonal patterns will hold, but in investing more aggressively during the October through April, particularly during pre-election and election years, while lightening up or avoiding the market altogether during the weak August-September period seems a wise strategy.
