by Dimitri Speck, Acting Man:
The Vote Buying Mirror
Our readers are probably aware of the influence the US election cycle has on the stock market. After Donald Trump was elected president, a particularly strong rally in stock prices ensued. Contrary to what many market participants seem to believe, trends in the stock market depend only to a negligible extent on whether a Republican or a Democrat wins the presidency. The market was e.g. just as strong under Democratic president Bill Clinton as it was under Republican president Ronald Reagan.
From a statistical perspective, the decisive factor for the market trend is not the party allegiance of the president, but rather the year of the presidency. In this context we speak of the presidential cycle, which has a distinct pattern over its four year duration.
The following chart depicts this election cycle, i.e., the average four-year pattern of the Dow Jones Industrial Average over more than a century. On the left hand side you see the pattern during the election year, followed by the first post-election year. Thereafter comes the mid-term pattern – which is highlighted by a red circle – and lastly the pre-election year pattern.
In the past 116 years the DJIA delivered the strongest performance during election and pre-election years on average. Post-election years typically also managed to generate gains. The mid-terms were typically the weakest time period.
2018 is a mid-term year. Should we expect weakness in the stock market? Let us take a closer look at the mid-term pattern of the market.
The Typical Mid-Term Year Under the Magnifying Glass
The next chart shows the typical pattern in the Dow Jones Industrial Average during mid-term years. In short, it is a close-up of the time period circled in red in the first chart.
The average mid-term year starts out with an advance, which is followed by weakness after peaking in mid April. In the final quarter of the year the market rallies again.
Over the year as a whole, the market on average barely manages to gain ground. What does this mean for 2018?
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