What to Expect in the Fourth Quarter of an Election Year

Schaeffer's Investment Research
  OCT 08, 2012 11:30 AM

We know it will be volatile, but will it move up or down? Here's the analysis.


Foreword: What a difference a year makes. Last year, heading into the fourth quarter, the Dow Jones Industrial Average (INDEXDJX:.DJI) was down five months in a row, losing about 13% in that span. This year, it's up four straight months heading into the final quarter, and up about 8.5% during that time. In 2011, however, the market strongly reversed and rallied 9.5% in October. Let's hope this month doesn't reverse this current uptrend. This week, we're going to take a look at how the market typically performs in the fourth quarter, and dig a little deeper by specifically looking at election years.

Fourth Quarter Is Strong: Below is a table summarizing Dow returns by quarter since 1950, and the fourth quarter clearly outperforms the others. The second table below shows more recent data (the last 20 years). In the past two decades, the final quarter does even better, averaging a 5.52% return in the last three months of the year and is positive nearly 80% of the time.

Election Years: This year, however, is a presidential election year. As the election is always a fourth-quarter event, it might be pretty useful to see if this changes things. The table below summarizes election-year returns since 1950. We still see the outperformance for the fourth quarter during election years. Most impressive is that they have been positive 13 out of 15 times.

But are election years more volatile than others? Perhaps the added uncertainty an election brings causes the markets to be a bit more erratic than usual. We measured this by looking at the standard deviation of daily returns during each quarter for the Dow over the past 20 years. Below are the results for each quarter during each Presidential cycle year. As suspected, the fourth quarter during election years produces the most volatile daily returns.

So, what can we expect over the next three months? According to the analysis above, we could very easily see a market that moves higher -- with a little extra volatility.

(See also: Ride Out the Short Term for the Next Major Market Surge, This Week's Key Events: Earnings Season Begins and PPI Data Hits the Street, and Dissecting the Sectors: Retail and Homebuilding.)

This article by Rocky White was originally published on Schaeffer's Investment Research.

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