Seizing the Opportunity of the Midterm Year – Strategic Series # 3

pdf Download this article in PDF

Published on 06 June 2014

 
Key Messages:

 

1. Game theory and market cycle
 

Definition : A Midterm election occurs two years after a Presidential election; one-third of the Senate and all of the seats in the House of Representatives are at stake. Conventional wisdom holds that the President’s party will lose seats during a Midterm election

The four-year U.S. Elections Cycle can be analyzed through the prism of game theory (political interests driving the markets) which explains the changes in distribution of yearly performances of the S&P500 since 1901

 

2. The Midterm Election Year in the U.S. is the turning point of the American elections term
 

Interest of this memo : we analyzed the impact of the U.S. Elections Cycle with the current year (Midterm election in November)

Methodology : we calculated average monthly cumulative returns of the S&P500 since 1901 and reconstituted the four-year average of the U.S. Elections Cycle

 

Yearly average performances of the S&P500 since 1901

Midterm fr

R.J. Schiller , Banque Pâris Bertrand Sturdza SA

 

3. The Midterm Year is often a transition year period with the weakest performance of the whole elections cycle
 

The average Midterm yearly performance has been +3% (+3% on median) since 1901

 
4. The year following the Midterm (Pre-Election Year) has the highest average positive performance of the cycle
 
The average yearly performance of the Pre-Election Year has been +10% (+15% on median) since 1901
 
5. There is usually a good entry point at the end of the Midterm Year (in October)
 

The average cumulative returns from October of the Midterm Year to July of the Pre-Election Year is +13% (in 10 months)

 

Independently of the political party in power, or of the market cycle, there is an observable effect of this seasonality on sectors of the S&P500

 

N.b.: The Presidential Elections Cycle is only one of many factors influencing economic and market conditions (world economic conditions, interest rates, investor psychology, and weather are also important variables to consider). The overall pattern of the performance related to the Presidential Elections Cycle is convincing but based upon averages which hide disparities