Most investors will have heard the adage “sell in may and go away” but what about “buy on Halloween and sell in May in pre-election years”? I know, it’s a bit of a mouthful, but this statement sums up the topic of a new research paper from Kam Fong Chan, University of Queensland – Faculty of Business, Economics and Law; Financial Research Network and Terry Marsh Quantal International Inc. who looked at this very topic.
For Nearly 100 Years Equities Have Outperformed Before An Election
The research duo studies the returns of equities and bonds in pre-election years from 1927 through to the present day. They found that investors have earned a statistically significant excess return of nearly 2% per month by investing in the US equity market from November through April in presidential election years. On the other hand, investors would have suffered by investing in Treasuries over the same period. During the nearly 100-year period studied, Treasury returns were found to have been higher in the months of May to October than in the winter months.
The outperformance of equities during the winter months is not a new revelation. In fact, this anomaly is one trend that has remained true of the markets despite all the research published. Indeed, Kam Fong Chan and Marsh point out that since the first study confirming the winter trend was published by Bouman and Jacobsen in 2002, several further studies have all appeared at later dates, which only confirm the anomaly (Jacobsen and Visaltanachoti (2009) and Zhang and Jacobsen (2013)).
Exactly why this anomaly persists is difficult to tell (even the authors stay away from speculating on a particular factor although they do discuss several potential drivers of equity returns). One thing to note is that the anomaly is not restricted to just US markets. The duo’s research shows that equity outperformance during pre-election winter months also persists in other developed nations, namely Canada, France, Germany, Italy, Japan, the United Kingdom, Australia and Singapore. Considering data between 1973 and 2015, for a total of 516 monthly observations and 10 presidential elections, the higher winter returns in year three of the US presidential cycle appear to be mirrored in international markets with all of them displaying statistically (at the 10% significance level) and economically significantly higher equity premiums from November to April in the U.S. pre-election year.
Considering the above findings, then, perhaps it is no surprise that equity markets have rallied following Donald Trump’s election.
Chan, Kam Fong and Marsh, Terry, No Matter the Winning Presidential Candidate, ‘Buying at Halloween and Selling in May’ Has Been Attractive for Equities in Pre-Election Years, with the Opposite for Treasuries (January 15, 2017).