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Election Year Boost Wanes for Stocks in July: Technical Analysis

The Standard & Poor’s 500 Index, down 7.4 percent since reaching a four-year high in April on weakening economic data, is about to lose another pillar of support: the election year calendar.

America’s benchmark gauge for equities has climbed an average of 0.1 percent in third quarters before a presidential vote in election cycles since 1945, the worst return of the year and down from an average increase of 2.2 percent between April and June, according to S&P. U.S. shares have returned 5.7 percent in election years since World War II, the second-worst performance during four-year executive branch terms.

Stocks have retreated following a rally in the first quarter, dragged down after reports on U.S. manufacturing and employment trailed economist forecasts and concern grew that Europe’s debt crisis will spur a global recession. The S&P 500 dropped 8.9 percent in the July-September quarter of 2008 as the financial crisis intensified. It has rebounded 1.9 percent on average in quarters after elections, S&P’s data show.

“This lack of direction is understandable, in our opinion, as investors are bombarded by the hype from the conventions, speeches and political advertisements, as they await the outcome of the upcoming election,” Sam Stovall, S&P’s chief equity strategist, wrote in a note yesterday. “Once the election is over, however, so is the uncertainty.”

While the index posts an average gain during the third quarter of election years, it’s just as likely to rise as fall, according to S&P’s data. The index’s lowest point during years of presidential votes have come in the first half 71 percent of the time, the data shows. The most consistent gains come in the final quarter, when the gauge has climbed 81 percent of the time.

Only twice out of the 17 election years since 1944 did the index bottom in the fourth quarter, in 2000 and 2008, when the market suffered the bursting of Internet and housing bubbles, respectively. President Barack Obama, a Democrat, is seeking a second term against Republican candidate Mitt Romney on Nov. 6.

This year’s low in the S&P 500 was made on the first day of trading at 1,277.06. The index then climbed 11 percent to a four-year high of 1,419.04 on April 2 before slumping as much as 9.9 percent.

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