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3rd Quarter | 2020

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Special 2020 Election Update: Part 2

By Jerry Wagner

Two weeks ago, I wrote about the different scenarios that history teaches are possible based on the party in control of the presidency and Congress. This was done through the lens of our Political Seasonality Index (PSI) that I developed for a series of columns back in the nineties for Barron’s magazine. (Our Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.) The PSI tracks the daily price changes of the Dow Jones Industrial Average through 13 different political and seasonal environments back to 1885. From that data, we can project what the future may look like if historical patterns hold.

To complete my projections this year, I’ve been waiting for the election dust to settle to know the party controlling the presidency, House, and Senate. I need this in order to publish the final PSI projections for the balance of this year and all of next.

Political Seasonality Index projections for two outcomes

Reaching resolution this election year has been especially difficult, and the wait has been long and in some quarters is still ongoing. The president continues to pursue his legal options. The prospect of a tie in the Senate remains possible with the Senate outcome dependent on the twin run-offs in Georgia on January 5. Only the House seems settled without controversy, although the Democrats received an unexpected shock as the Republicans flipped at least 10 of their 17 vote control.

Since control of the Senate will not be decided until next year, we can proceed based on the present Republican control of that chamber of Congress in our PSI projections for the remainder of the year. In deference to the fact that many states are still counting, recounting, and auditing their results, we’ll examine the two presidential possibilities in combination with a Democrat-controlled House and a Republican-controlled Senate.

The graph above charts out the PSI for both of these possibilities. Here you can see that the seasonality factors tend to overwhelm the political factors. The lines are virtually the same.

For that reason, I’ve also included the charted behavior for the average of just the four political factors contained in the 13-element PSI. The differences are a little more apparent. Focusing just on the political, a victory for the Democrats seems to be more bullish for the balance of the month and also seems less bearish in the forecasted decline in the first half of December.

Also, looking at the yellowish DDR Pol only line, you can see that it more closely matches the Dow’s actual behavior since the election. This reflects the media’s call of the presidential election for the Democrats and the fact that most of the experts have suggested that the Georgia outcomes lean Republican given the past political tendencies of the state. It is impressive how the actual results so closely match the ups and downs of the historical projections!

Finally, it is important to note that all of the lines slide lower from November 16 until November 19. They then all peak on November 27 before falling to a mid-December low.

Although I have always believed that the best use of the PSI is to determine these likely turning points, it is encouraging that all of the projections finish out the year higher than where we are now and where we were on Election Day. Of course (spoiler alert), this is always the case, as the stock market’s tendency to trend higher at year-end has been so pronounced throughout history. But that tendency, too, is a good thing for investors who want to see profits at this important time of the year.

In the following chart, I’ve included the projections for 2021. These will change a tiny bit based on the post-election price changes yet this year. Still, it is probably close enough.

I will leave the analysis of the 2021 PSI projections to January. By then, we will know the outcome of all the races (I hope), and we can take a deeper dive into the projected turning points.

Elections and politicians come and go. But, like a sleigh in newly fallen snow, they leave their tracks behind in history. Markets fluctuate, trend, and whipsaw, but seasonal cycles tend to persist and, like leaves carpeting the grass below a great tree, colorful patterns often emerge. Our Political Seasonality Index suggests there may be something to glean from the tracks and patterns. Regardless, politics, the seasons, and the markets always seem to prove interesting to observe and, perhaps, even to profit from.



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