Pre-Election Years Are Historically Positive for Markets; Will 2023 Be an Outlier?

• The S&P 500, Dow Jones, and Nasdaq have all done well in pre-election years
• With a tumultuous year behind us now, things are looking good for the indexes
• With another pre-election year on the horizon, could this be the year when the indexes rally?

With the US presidential election on Tuesday, Nov. 5, 2024, we are in a pre-election year.

If we look at the S&P 500, we see that the first quarter of a pre-election year has been positive 17 out of 18 times since 1950, with the index rising by an average of +7.4%. This was also the best quarter of the entire four-year presidential cycle. On top of that, the second quarter has been quite good as well.

The pattern of the presidential cycle is generally like this: the first two years of the presidential term are the worst for the stock market, as this is when the least popular policies are adopted, while on the other hand, the last two years of the term are the best for the stock market, as this is when the most popular policies are adopted, simply because elections are approaching and they want to win votes.

Thus, the first and second years are the worst for the stock market, while the third and fourth are the best. Of all the years, the third would be the best. History tells us that the average performance of the S&P 500 since 1900 has been as follows:

• First presidential year: +6.82%.
• Second presidential year: +2.94%.
• Third presidential year: +11.84%.
• Fourth presidential year: +7.63%.

By the way, the biotech, industrial, and healthcare sectors tend to be favored under the Democrats. Pharmaceuticals and airlines tend to win when Republicans are elected.

Moreover, the market did well when capitol hill was divided. Although it did better when controlled by Democrats. But, these key factors are still relevant for the S&P 500:

1. It still can't handle the 200-day moving average. It couldn't in March 2022, August 2022, December 2022, and now January 2023. On some of these occasions, it started to overcome the average a little but failed and rebounded lower. As long as it remains above 3,783, there are no problems, but it needs to break the 200-day average to start flying.
2. If we plot the Fibonacci levels down to the relevant low (October 2022), we obtain a series of zones. These zones generally act as both upward targets and resistance. The first zone was reached in November 2022. It was the first upside target and also acted as resistance. The second zone, or second medium-term upside target, is at 4,150 points.

Dow Jones

Dow Jones Daily Chart

Like the S&P 500, since 1900, the Dow Jones Industrial Average has performed better when Democrats are in the White House.

Since Biden entered the White House, the Dow Jones has set 44 new all-time highs and has gained +7%, placing him 13th among the last 21 presidents. Since 1900, other presidents have seen a better performance of the Dow Jones Industrial Average. The top ten are as follows (except Biden):

1. Franklin Roosevelt (1933): +90.5%.
2. Calvin Coolidge (1923): +51.7%.
3. Barack Obama (2009): +48.7%.
4. Warren Harding (1921): +39.3%.
5. Richard Nixon (1963): +33.9%
6. Gerald Ford (1974): +26.8%.
7. Donald Trump (2017): +24.6%.
8. Bill Clinton (1993): +19.4%.
9. George Bush (1989): +18.4%.

But there are two main issues with the Dow Jones:

1. Like the S&P 500, it is still unable to overcome its resistance, which in this case formed in August, and the index failed to overcome it in November, December, and January. A break above 34,587 would be a positive signal.
2. A golden cross has been triggered. It was also triggered in mid-December, and there was a rally, but resistance is preventing a break at the moment.

Nasdaq

NASDAQ Daily Chart

The year that has just ended saw Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) losing ground for the first time since 2008.

In 2022:

• Apple: -26%.
• Amazon: -50%.
• Alphabet: -39%.
• Microsoft: -28%.

In 2008:

• Apple: -57%
• Amazon: -45%
• Alphabet: -56%
• Microsoft: -44%

In the 14 years between the two periods, there was no year in which the shares of the four companies fell. There were years when all four gained (2009, 2012, 2013, 2016, 2017, 2018, 2019, 2020, 2021).

Since 2000, the Nasdaq 100 has performed as follows:

• 2000: -37%
• 2001: -33%
• 2002: -38%
• 2003: +50%
• 2004: +11%
• 2005: +2%
• 2006: +7%
• 2007: +19%
• 2008: -42%
• 2009: +55%
• 2010: +20%
• 2011: +4%
• 2012: +18%
• 2013: +37%
• 2014: +19%
• 2015: +10%
• 2016: +7%
• 2017: +33%
• 2018: +.04%
• 2019: +39%
• 2020: +49%
• 2021: +27%
• 2022: -32%

The S&P 500 is on track for its best month since July, thanks to the semiconductor sector. Since its two-year low in mid-October, the Philadelphia Semiconductor Index has risen +30%.

Disclosure: The author doesn't own any of the securities mentioned.