One Week Until Election Day

There’s exactly one week until Election Day and while I hear a lot of people saying that “We won’t know who our President is until December, at least,” I disagree.  Name a time in U.S. history when we had millions of people voting live at the polls, weeks before the election even took place?  Sure, there are always absentee votes every year, but this year is different.

In fact, more than 50 million people (that’s roughly ¼) have already voted, and it’s being predicted that this could be the largest voter turnout in U.S. history.  I would argue that, if this election does break records in turnout rates, it will be largely due to the millions of people who voted – live at a polling station – well before the election.  It is for this reason that I believe we’ll know who the President of the United States is next week.

The stock market is starting to get a little jittery as we approach the final days before the Presidential Election.  As you can see below, Monday’s market action saw the S&P500 briefly get “dunked under water,” below its 50-day moving average (the blue-shaded area) before climbing back and closing above it at 4pm.

I’ve also noticed a convergence between that 50-day trendline and the February pre-COVID highs.  Whenever these potential “lines in the sand” converge, they become more important and we need to pay close attention, especially if they break.  In my opinion, the last “floor” below our feet would be the January 1^st 2020 break-even point, which sits right around 3,235 on the S&P500.  This also happens to be a level the market bumped its head into back in early-June… and later, this same level held (but above the black dashed line this time) and the market bounced off of in late-September.

I’ve been tracking an incredibly accurate indicator that has an 87% win-rate when predicting the winner of the U.S. Presidential Election.  If the S&P500 is up in the three months prior to election day, the incumbent President has won 87% of the time.  I’ve drawn a horizontal red, dashed line where this level exists, and as you can see below, the market has largely been above this line for the majority of this three-month period.  However, this last two weeks, it’s been heading downward with five trading days to go until Election Day.

So, what happens if the indicator above is accurate once again and Trump wins the election?  In the table below, you can see the total annualized performance of the S&P500, depending on whether the President is a Democrat or Republican (top) and whether congress is Democratic, Republican, or split.

What jumps off the page (above) is the higher rate-of-return when a Democrat is president, with one exception – when there is a Republican president and a split Congress.  Averaging them both out, however, I found that the ROR for a Democratic president has been 16.27%/year, while the average ROR for a Republican president is 11.93%/year.

Taking things a step further, you can see the metrics in the table (above) by looking at the chart below.  Since WWII, there have been times when both a Republican and Democratic president have presided over incredible bull markets throughout history.  However, when observing closely, you can see that the Republicans’ stock market performance this past 7+ decades has been plagued by the market crashes in the late-60’s, mid-70’s, the dot-com bubble (2000-02), and The Great Recession (2007-09).

What if Trump wins, however?  Are all these historical averages above a suggestion that the market is doomed if the President wins re-election?  Actually, the answer is “no.”

Having nothing to do with whether the President is a Democrat or Republican and focusing only on whether the incumbent or the challenger wins the election, as it turns out, the stock market tends to perform better when the incumbent wins.  Almost twice as good, actually.

The only time you’ll see me watching CNBC (which is all day long, every day), I have the volume turned all the way down.  This is because I want to know if something earth-shattering is going on, but not much else.

The vast majority of what you hear, read, and watch is “noise” that you should really be ignoring.  I focus my attention on a few fundamentals (that’s maybe 15-20% of my analysis) and the rest is all about:

• What price is doing – are we trending up, down, or sideways?
• Momentum – are we in a positive range and are there any divergences?
• Volume – is the market going up on big-volume days, or is it going down?
• Relative Strength (RS) – which sectors, industry groups, bonds, commodities, currencies, and individual stocks are out-performing in the intermediate term?

These are the things that matter, because regardless of who the next president is, the market may fall and it may rise.

But when it rises, something will go up in value, and if we focus on price, trend, momentum, volume, and relative strength, we’ll be a whole lot better off than we would if we made our investment decisions by what we heard on the news this morning.

Till next time…

Adam