Over the Past 76 Years Capital Markets are Positive 94% of the time after Mid-Term Elections, Can History Repeat?

Donald W. Capone III CFA

12-20-10


Due to the overwhelming response and our surprise findings in our earlier research we set off to expand our research concerning capital market returns during the four year terms of presidents and elections.


As a review from our prior research, we wanted to determine capital market returns as measured by the S&P 500 index (a broad based US based large company index) the year following mid-term elections. Our reasoning for the year following is that is when the new members are in office and can begin effectuating changes. The chosen year was derived as it corresponds to the coming year, 2011, and with the latest capital market movements we were interested in a historical look back.
In summary, we found over the last 19 four year periods after a mid-term election, there was only one down year. Said another way, over 76 years of historical four year mid-term election years, only once in 19 periods was a down year. We also found that the average return over these mid-term election years was 17.71%.

Still wanting to validate our findings that over 70 years of history in our country there would be only one down year following mid-term elections we set out to reassess our findings. We felt there is something there, so we dug deeper by using other four year averages and overall average comparisons.


There are various ways to statistically measure the odds of this happening we wanted to simplify our findings and validate them at the same time.


Our expansion of research was accomplished in the following manner:

1.Review and determine the probability over our 70+ year period of time the capital markets in any one year would be down

2. Analyze all four year periods around the presidential mid-term elections to find the other four year rolling results

3. Compare our Mid-Term election Four year rolling returns associated with the full yearly total and the rolling presidential related terms

The findings continue to surprise and validate our original findings, which leads us to believe there is some type of positive affect associated with the year following mid-term elections.


After our additional research and analysis here is what we found:


Over the 76 year period of time we measured, 28.9% of the time the Capital markets had a negative year, or said another way 71% of the time the capital markets had a positive return for the year. Our mid-term election year period was positive annually an astounding 94% of the time, far greater than the average.  Past performance is not a guarantee of future results and history rarely repeats itself exactly, however it does sometimes rhyme.

 


In comparing our mid-term election year to other four year rolling returns we discovered that the mid-term election year, by this time as no surprise, was much greater.


The actual year after a presidential election (or first year of new president at times), earned the worst stripes with positive returns 53.36% of the time, again using our historical 76 year period as our sample period.  (This is logical as often a new system may be in place and many changes may result in big losers in certain areas of the capital markets.)  

 


The year of mid-term elections, similar to 2010, saw positive returns 63.16% of the time, well under the average of 71%.
The year of a presidential election or year of campaign, showed a positive return 73.68% of the time, finally besting the average over our 76 year period sample, but again well under the 94% post mid-term year.   


In completing research such as this, we are always conscience of accidental findings that may look to have meaning but do not. At the onset of this project we set out to find an answer to a question we had interest in knowing and had not seen before. We also reviewed other studies and found no similar comparisons, most were of shorter, longer or different time frames. Again our time frame was set on simplicity and basic reason. 


We had nothing to prove and only an interest in the historical facts. Had we found nothing relevant or unusual, which we expected, we would have been less surprised.

Given our findings, and in our opinion, there is something relevant there, however we can only postulate at what it is.

  
Can we conclude that 2011 will be a positive year?


Of course not, as past performance is no guarantee of future results and records are made to be broken, even 94% historical records, however, we find our results so surprising we have slightly increased our forecasted return for the year 2011. We will be interested to review this pattern again at the end of 2011.

 

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