Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

2nd Quarter | 2022

Market insights and analysis


Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By Jerry Wagner

FPI’s Political Seasonality Index

In 1999, I began working with writer Susan Ward at the weekly financial news magazine Barron’s to produce a series of columns on Flexible Plan Investments’ (FPI’s) Political Seasonality Index (PSI).

In the first issue of each year, we would show a chart of the turning points in the Dow Jones Industrial Average (DJIA) for the year ahead based on the twists and turns of the PSI. In the final issue of the year, we would republish the forecast chart from January and overlay the actual chart of the Dow during the past year and see how closely the Dow followed the predicted course.

For example, Susan wrote in Barron’s in summing up 2000,

A contortionist would have had a hard time following the twists and turns of the Dow in the year just past. But those who kept an eye on Jerry Wagner's Political Seasonality Index, introduced to Barron's readers a year ago (December 27, 1999, and January 3, 2000), would have had an easier time keeping it all straight.

A few years later, we made the Index an exclusive part of our Weekly Update (our Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category). We also created a strategy that enabled FPI client accounts to be traded based on the PSI’s turning points.

The PSI is much the same as when I created it in the 1990s. Back then, I produced a DJIA history of daily price changes that went all of the way back to 1885. Then I overlaid the status of various events, some seasonal (day of the week or month of the year, for example) and some political (which party controlled the presidency, the House, and the Senate, and so on).

This allowed me to find the historical daily percentage change in the DJIA for any mixture of future events. For example, I could find out what the DJIA did on average on the third Tuesday in March when the president was a Democrat and Congress was controlled by the Republicans. Originally, there were 11 events tracked in the PSI. A few years ago, I added two more.

What can the PSI tell us about the market under different political parties?

With the election this week, I thought it might be interesting to examine all of the data we’ve collected to see what it tells us about the likely path of markets when viewed under solely a political lens. This will be completely nonpartisan. No political viewpoints will be voiced, just statistics, but there will be plenty for partisans of all stripes to point to in support of their own particular point of view.

The following charts use all of the DJIA data back to 1885 to calculate the relative stock market positivity of party control of the presidency, the House, and the Senate for the remainder of 2020 and separately for all of 2021. The designations of, for example, DRD at the bottom of the columns mean a Democrat in the White House, a Republican-controlled House, and a Democratic-controlled Senate.

I’ve shown the results of running just the four political components (POL) of our PSI, as well as the entire 13-factor PSI. On the one hand, you can observe that the differences are more apparent when focusing on just the political elements. On the other, note that once seasonal factors are included, the results of who wins the election become less important. This may calm the fears of those investors fearful of what may happen in the near term and next year.

Presenting the data in the two previous charts in the following color-coded table may make it easier to decipher. Returns shaded in green are the best, while red is the worst.

Focusing on the political elements only, and zeroing in on the most likely outcomes (those shaded in yellow), the best returns for the balance of this year are derived from the period with a Republican presidency and a Congress controlled by the Democrats. It just edges out a Democratic sweep. Of course, as we saw in the results the last time around, a Republican sweep brings the top stock market returns. However, this does not appear to be in the cards this time around.

Turning to 2021, a Democratic sweep has historically yielded the best returns in the DJIA in the year after the election. The present configuration of a Republican president and a split Congress (Democratic House and Republican Senate) yields the worst result for 2021. Again, though, you can see that once you factor in the seasonal factors in the PSI, the differences are negligible.

When I look at the results just since 1972, I notice a tendency that I have not seen commented on in the financial press. In that 48-year period, encompassing 12 elections, the market has only been good when we had a Democratic president when the Republicans controlled the House. Conversely, the market has only been bad for Republican presidents when the Senate was controlled by the Democrats.

Using our previous coding. The best scenario with a Republican president has been the present setup, RDR. The worst has been RRD. With a Democratic president, the best scenario has been DRR, while the worst stock market has been when the lineup was DDR.

Finally, as we are the subadvisor of the nation’s only mutual fund that seeks to reflect the daily change in the price of gold (The Gold Bullion Strategy Fund, QGLDX), I thought I’d look at the result for gold. The price of gold has only freely fluctuated since 1972. Since then, the best Republican scenario has been RRD, and the worst has been RDR. The best Democratic result for gold has been DDD, while the worst has been DDR (although, incredibly, this scenario has only existed for 11 days since 1885).

Whenever this election is decided (hopefully this week), I’ll provide a graph and chart of what can be expected for the rest of the year and for 2021 if historical tendencies persist in those periods. Please watch for the second part of our “Special 2020 Election Update.”

It is always fun to examine these historical tendencies, but tomorrow we can all help make political history by voting. As I wrote last week, it does make a difference!

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