Chart of The Day - Average Pre-Election Year - Is 2011 Keeping Historical Pace?

Today's chart illustrates how the stock market has performed during the average pre-election year.

Since 1900, the stock market has tended to perform well during the first seven to eight months of the average pre-election year. For the remainder of the year, pre-election performance has tended to be more flat/choppy. In the end, however, the stock market has tended to outperform during the entirety of the pre-election year.

This pre-election year has followed the path of the average pre-election year rather closely with a rally up until mid-February and a correction into mid-March with the aftermath of the devastating Japanese earthquake and tsunami weighing heavily on the market over the past few days.

Chart & Commentary Courtesy of Chart of the Day

Chart of The Day - Average Pre-Election Year - Historical Performance

Today's chart illustrates how the stock market has performed during the average pre-election year. Since 1900, the stock market has tended to outperform during the first 6 to 7 months of the average pre-election year.

For the remainder of the year, pre-election performance has tended to be choppy and slightly subpar. In the end, however, the stock market has tended to outperform during the entirety of the pre-election year.

One theory to support this behavior is that the party in power will make difficult economic decisions in the early years of a presidential cycle and then do everything within its power to stimulate the economy during the latter years in order to increase the odds of re-election.

Chart & Commentary Courtesy of Chart of the Day

Seasonal Tendencies - Historical Backdrop Favorable...

Historically, the best 6-month period to invest in stocks is from November through the end of April.

According to Stock Trader’s Almanac, between November and April, the Dow Jones Industrials have returned +7.4% on average during the 6-month period since 1950.

By contrast, from May through October period the Dow Industrials have seen average gains of just +0.4%.

Therefore, remarkably enough, 94.8% of all stock market gains since 1950 have come during the November through April period.

Historically, we are in a very favorable seasonal period for stocks for three reasons:

First, November 1st is here and the best 6-month period of the year is about to begin. 

Second, we're in the sweet spot of the Presidential Cycle, a period in which stocks have enjoyed above-average returns with below-average risk.

Third, stocks are also entering the most favorable 3-month historical span—the period from November 1 through January 31. 

Over the past 60 years the S&P has gained roughly +5.0% during this 3-month period—a +21.5% annual rate.

While it is truly remarkably how consistent these 3-month and 6-month tendencies have been over the past 60 years, remember that these are long-term seasonal tendencies, not certainties for any given year. 

Seasonal tendencies are strongest when the economic fundamentals are healthy, much as they are right now. At present stocks don’t have to contend with exorbitant valuations, runaway inflation or a hostile Fed.