Market insights and analysis

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, select the QFC Political Seasonality Index strategy.). 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 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, 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. More than a decade ago, I added two more.

So far in 2022, our PSI strategy has been among our top performers.

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 chart uses 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 2022 through all of 2023. The designations of, for example, DRD on the chart mean a Democrat in the White House, a Republican-controlled Senate, and a Democratic-controlled House.

I’ve shown the results of running just the four political components 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 previous chart 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 most likely outcomes (those shaded in yellow), the best returns through the end of next year clearly are derived from the period with a Democrat in the presidency and a Congress controlled by the Republicans. With the key Senate races rated a toss-up as I publish this, it appears that the odds of this occurring may be lower than the other scenario being discussed most often by the election gurus.

While I’m betting on the former, the more hyped version is one in which a Dem president has to work with a Congress that is split between a Democrat-controlled Senate and a Republican-controlled House. This, unfortunately, yields the worst returns of the four possibilities.

You can really see the difference between the two scenarios by charting the day-to-day fluctuations of each.

While incorporating the Political factors into the PSI erases most of the differences, the slope of the PSI line in the split-Congress version is flatter and does not achieve the same height as the Republican-controlled edition. Even the PSI version is pulled down by the Political factors due to the obvious underperformance of the stock market in the past when split control occurred.

The steep drop at the beginning of the Political line this year is noteworthy in the DDR Comparison and should put us on guard from December 7 to December 21. Also, the June 7, 2023, top stands out in the prognostication for 2023 should the split-Congress scenario occur.

Drilling down

Most very long-term studies of the effects of politics on the markets conclude that having different parties in control of each house of Congress yields the best results. Our PSI studies tend to contradict this, at least in the case of the DDR environment.

However, when we examine only the last 50 years (since 1972), the results seem to have shifted from the consensus view. Let’s drill down and examine the issue step by step:

Looking just at the sole factor of who controls each house, we find that a Republican-controlled House tops a Democrat-controlled House in its effect on the stock market, at least since 1972. At the same time, the S&P 500 does better with a Republican-controlled Senate than with a Democrat-controlled body.

Yet when you expand to a two-factor analysis, considering the control of each house simultaneously, an end result of Republicans controlling both houses does well (12.1% CAGR). A split Congress in which the Democrats control the House and the Republicans control the Senate ekes out an advantage and earns the best returns (13.6% CAGR). One of the more likely scenarios (Republican control of the House and Dem control of the Senate) is the worst performer with just a 2.6% return. This is just what we found in our PSI study.

How can we resolve the seeming contradiction of the first two tables? Since anything the Congress does has to pass through the president’s veto to become law, adding the party of the president into the mix gives us a more complete view. We will have a Democrat in the presidency for the next two years. Therefore, we only have to consider the four Congressional possibilities that can occur with a Democrat in the White House.

This three-factor view, rarely published elsewhere, shows that since 1972 the best result for the stock market occurs with a Democrat-controlled presidency and a Congress where both houses are controlled by the Republicans. The second-best result is a House controlled by the Republicans and a Senate controlled by Democrats.

The latter result does not square well with the PSI results. But it is based on more recent but shorter-term information. It also does not have the benefit of the other seasonal factors included in our PSI.

In any event, since these two scenarios, based on the latest polls, seem to be the most likely result after the smoke has cleared this week, this could be very good news for stock market investors who have so far suffered through a very difficult 2022. Remember, however, that control of Congress does not change until the first week of 2023, not when the results of the election are announced.

We can use the same analysis on other asset classes. Bonds and the U.S. dollar have historically done best with a Democrat in the presidency and both houses of Congress controlled by the Republicans. They have done the worst when the Democrats controlled both houses.

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), the results for gold are definitely of interest. The price of gold has only freely fluctuated since 1972. Since then, the best result for gold while a Democrat has been president has been DDD, while the worst has been DRD (although, incredibly, this scenario has only existed for 11 days since 1972). Here’s a look at all four gold scenarios:

Please vote. It can make a difference.

It is always fun to examine these historical tendencies, but we can all help make political history by voting. It does make a difference!