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Why Today’s Election Should Kick Start a Market Rally

Ian Wyatt

Fellow Americans, our national nightmare is almost over. Election Day is finally here. Voters can breathe a sigh of relief the second they hand in their ballots. So can investors.

The weeks and months leading up to a presidential election can be intolerable – if not for the barrage of nasty political ads and endless analysis, then for the uncertainty of which direction the country is headed for the next four years. That uncertainty is especially intolerable for investors.

By rule, stocks generally fall ahead of an election. The rule has held true again this year. The S&P has fallen 2% in the last month. The Dow is down nearly 3%.

But better times could be ahead this month.

In presidential election years, November is the best month for the Dow Jones Industrial Average and S&P 500 indices. The Dow climbs by an average of 1.6% in election years. The S&P gains 1.4%.

It makes sense. There’s so much uncertainty in the markets leading up to an election that once a new president has finally been elected, investors go on a collective spending spree. Add in the fact that November is already the third-best month for stocks historically, and it generally makes for boom times in the market in election years.

However, that wasn’t the case four years ago. Stocks plummeted in November 2008 after Obama was first elected to office. The S&P declined nearly 6% between Election Day and the end of November. The Dow shed over 300 points.

But the circumstances surrounding the 2008 election were unique. America was in the throes of its worst recession since the Great Depression, and U.S. markets were in the midst of a six-month tailspin that didn’t end until March 2009.

Thus, the 2004 election might be a better gauge of what to expect this time.

In the month after George Bush was re-elected, the S&P 500 gained 1.9% while the Dow surged an even 2%.

The market could certainly use a November rally this year.

The S&P and Dow have struggled of late, but the NASDAQ has actually had the worst month. The tech-heavy index has declined more than 4% since the start of October.

Unfortunately, that probably won’t change much even after today’s election. Election years are typically bad for NASDAQ stocks, with an average drop-off of -0.8%.

Of course, presidential elections don’t occur in a vacuum. Each election year comes with its own unique set of circumstances.

This year, those circumstances are a bit murky. The U.S. economy has been slow to grow, the unemployment rate is just a tick below 8%, and a so-called fiscal cliff is looming on January 1. The financial climate isn’t as dire as it was in 2008 … but it’s more dire than 2004 and many other recent election years.

Uncertainty will remain even after we elect a president today. But – one way or another – things will seem a lot more certain once all the votes have been tallied tonight. (That’s assuming we don’t have any recounts, which are a possibility in a few swing states.)

Sometimes the mere appearance of certainty is enough to convince investors to start buying stocks again. For the next month, at least, knowing who will be our president in the coming years should be all the certainty the market needs.

At least until the fiscal cliff deadline approaches.

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