Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Stocks and Election Years -- What's the Connection?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

What is all this January talk?

There's the "January effect" and the "January barometer" and the "first five days means this" and yada yada...

Stock watchers love nothing more than reading the tea leaves, especially at the beginning of a new year. And after a disappointing 2011, they are looking for any sign that the market is headed up.

The Magic 8-Ball
An election year only adds to the divining about the future of the market and the presidency. S&P 500 returns in the three months leading up to a presidential election have predicted the victor in the last seven elections, and the degree of the change seems to correlate with the margin of victory in the election. If the market was up between the end of July and the end of October, voters kept the ruling party in office; if it was down, they elected the opposing candidate.

Investors can apply this pattern conversely. If polls this summer show Barack Obama is likely to win, you might expect a market rally up to the election. Of course, improved economic news would certainly help him to victory, which would benefit the market as well. Overall, elections appear to be good for stocks as the market has risen in 13 of the past 15 presidential election years. This year, the tight polling seems to mirror the flat market we've had over the past year.

Some analysts talk of a January barometer, the predictive powers of the first month of the year, which they claim is even stronger in an election year. A positive January in an election year has predicted a full-year gain in the S&P 500 all eight times it's happened since 1945 with an average gain of 16%. A negative first month predicted a full-year decline 56% of the time with an average loss of 3.9%.

One study by Pepperdine University business professor Marshall Nickles found that stock market cycles tend to last about four years, tracking the election cycle with bottoms two years into the presidential term and peaks at the end of the election year. Nickles explained that through the administration's control over fiscal and monetary policy, the president can "pump up" the economy before an election through an economic stimulus, which results in inflation that must be addressed in the beginning of the next presidential term leading to a bear market. In today's political climate, however, another stimulus is unlikely. Nickles' study was also published in 2004 before the financial crisis that came during an election year, contrary to his model's projection.

The good news
If you're the type of investor who needs a better reason than election correlations to feel confident, take heed in the fact that the S&P 500's (INDEX: ^GSPC  ) P/E ratio dipped to a quarter-end low this past October not seen since 1989.Earnings per share for the index are at record highs, surpassing pre-recession figures, and are expected to continue rising. Despite high unemployment at home, the debt crisis in Europe and worries about a slowdown in China, corporate earnings are marching higher. Earnings per share for the index is projected to increase about 11% from last September to September 2012, and dividends per share have also grown by more than 20% since bottoming in 2009.

Those positive signs could favor cyclical stocks such as Alcoa (NYSE: AA  ) and Caterpillar (NYSE: CAT  ) , two Dow stocks expecting earnings-per-share growth of more than 40% this year, whose prospects would only increase with an improving economy and investor sentiment. I also think Corning (NYSE: GLW  ) , along with Alcoa, could recover nicely this year, as they both trade near their 2009 low with P/E ratios of 6.6 and 9.9, respectively. Corning's Gorilla Glass, which will benefit from growing smartphone sales and could become more prevalent in TVs, makes it an even more alluring investment to me.

Of course, the presidential election isn't the only major event taking place this year. With the Olympics set for London this summer, I expect another strong performance from Nike (NYSE: NKE  ) in 2012, which has outperformed the S&P 500 by an average of 24.5% in the past five Summer Olympics years. The Olympics serve as a showcase for sport and the apparel brands that support it, and Nike is the market leader in the United Kingdom. A new Nike concept store near the Olympic grounds will further help promote this global brand.

With the election, the Olympics, and some strong manufacturing reports to start the year, 2012 looks more promising than 2011. We can help you get your new year started off on the right investing foot with this report on a stock our experts are calling "The Motley Fool's Top Stock for 2012." The report is free, but it won't be here for long. You can read it now by clicking right here.

Fool contributor Jeremy Bowman owns shares of Nike but holds no other positions in the companies in this article. Motley Fool newsletter services have recommended buying shares of Corning and Nike. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2012, at 3:31 PM, incomeplease1 wrote:

    This SeekingAlpha article on the January Barometer describes an aspect of it I'd never heard case you are interested:

  • Report this Comment On January 10, 2012, at 8:25 PM, Hawmps wrote:

    So if a positive January during an election year yields an average 16% increase for the year, it is going to be tough to "beat the market". That's fine, I'd settle for a tie-breaker in 2013.

    <"Nickles' study was also published in 2004 before the financial crisis that came during an election year, contrary to his model's projection"> I think that the events that led to what is described as the Great Resession should be considered as an outside force that would not normally affect the cycle of his model. This had such a wide spread impact world wide that the model could not fit in the 2008 election period. The time period could be considered a statistacal outlier.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1755693, ~/Articles/ArticleHandler.aspx, 10/28/2016 10:06:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,222.52 52.84 0.29%
S&P 500 2,134.93 1.89 0.09%
NASD 5,220.57 4.60 0.09%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 9:56 AM
^GSPC $2134.75 Up +1.71 +0.08%
S&P 500 INDEX CAPS Rating: No stars
AA $28.24 Up +0.02 +0.05%
Alcoa CAPS Rating: ****
CAT $83.36 Up +0.35 +0.42%
Caterpillar CAPS Rating: ***
GLW $23.09 Up +0.17 +0.74%
Corning CAPS Rating: *****
NKE $52.14 Up +0.25 +0.48%
Nike CAPS Rating: *****