The Day After Presidential Elections: Usually Not Good for the Market, Part 2

November 7th, 2012

by Doug Short

In response to several requests, I've written a part 2 to my earlier commentary on pre- and post-election market behavior. The original piece examined the S&P 500 since the middle of the last century. Now let's take a longer look back at the Dow Jones Industrial Index, which was launched in the spring of 1896, the year William McKinley was elected to his first term as president.

There have been 30 presidential elections during the history of the Dow. The Republican party candidate has been elected 16 times, the Democratic party candidate 14 times. The Dow close prior to the vote count has been positive 73 percent of the time (22 of 30). Positive day-after closes fall to 47 percent (14 of 30).

If we limit the look back to 100 years, excluding the astonishing post-election-day market exuberance from McKinley's first term through Wilson's first term (which averaged a whopping 2.68%), the number of day-after gains drops to 30 percent.

We can express the extreme manic-depressive behavior of the Dow at President Obama's first-term victory by subtracting the day-after closing percent from the day-before closing percent. It was a stunning 8.33 percent. Only one former president did worse: By this metric FDR's first term registered 9.46 percent. In distant third place was Harry Truman at 4.63 percent.

Of course the November 2008 face-off between Obama and McCain was a grim time for the markets, taking place just seven weeks after the Lehman Brothers bankruptcy. In fact, the S&P 500 fell another 5.03% on the Thursday after the 2008 election.

Fortunately, the Financial Crisis is behind us, but unfortunately we're fast approaching the Fiscal Cliff.

To paraphrase my observation at the conclusion the S&P 500 commentary: The market will be especially focused on how the lame-duck split Congress addresses the grim politics of the federal budget and the expiration of the Bush tax cuts.

Interestingly enough, the first move appears to be Republican House Speaker John Boehner's gesture of willingness to compromise on revising the tax code (more here). The devil, of course, will be in the details.

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