There are quite a few theories on how politics affects the stock market and which stocks you should invest in when a new President is elected into office.
The main idea underlying these theories is that the political party in power -- Democratic or Republican -- determines how the stock market will go or how certain market sectors will fare. Republicans, for instance, are supposed to be pro-defense, and thus one would expect defense stocks to perform quite well under largely Republican regimes.
But is this true?
Analysts and reporters write about such things all the time, advising you to buy this or that type of share because a new party comes into office. But are these political forecasts worthwhile? How can you know for sure?
Should we take politics into account at all when trying to determine whether to buy shares in certain companies, hoping they will go up? There's only one way to find out. We therefore produced the historical political seasonals for stocks, indices and ETF sectors for when Republicans or Democrats were in control of the White House, Senate, or Congress (House of Representatives).
Unlike anyone else, we produce all three of these political seasonals for market timing and the results are surprising; the Republicans aren't the only party "good for business" because the charts show that Democrats are often a boon to certain companies and industries. Sure you can see that George Bush II was good for the oil and defense industries, but what other industries benefited under the radar?
Trying to be as complete as possible when it comes to politics and its influence on the stock market, we also produce charts showing how individual stocks, sectors and indices perform under the first year, second year, third year or fourth year of a Presidential election cycle as this is also a well known market timing mechanism. Wouldn't you like to know whether the stocks you own are affected at all by the Presidential election cycle? We'd like to know, so we compute that as well. If it becomes important, meaning that the prices are showing a high correlation to the political seasonal or election cycle, we include that information in our newsletters.
So far, so good. Whether all this information is useful or not all comes down to the fact that a stock's prices tend to follow any of these political seasonal patterns or does not. That's it -- does it follow any of the political seasonals or not, is the price correlated to the political seasonals or not?
Most stocks will tend to follow the pure seasonal price pattern. This is a well known fact, which is why people tend to follow price seasonals in the first place and why it's the major chart to rely on and first place to start your market timing analysis.
Certain stocks will follow the economic seasonal pattern more closely than anything else, including the price seasonal since a set of past years' prices lumps together (averages out) all sorts of different market environments. What you really want to know is whether a stock's prices are more closely following the seasonal pattern produced within good or bad interest rate environments, inflationary environments, deflationary environments, recession/expansions or something else.
And of course for some stocks the prices are indeed affected by the political environment ...
What we do is compute all these factor seasonals and monitor the correlations of the actual real time stock prices to these seasonals. Any time one of these various seasonal charts tends to dominate the price pattern, that becomes the main forecast of stock prices for the near term future ... but only if that pattern is also confirmed by some of the other seasonals as well.
Want to see an example of political seasonal charts? The following charts show a variety of political seasonal charts for Halliburton whose business contracts are often somewhat dependent, it is claimed, on political decisions.
We do not maintain that stocks HAVE to follow the political seasonals that we deconstruct out of the history of market prices. In most cases it's the economic and price seasonals that will dominate matters. But we always compute the political seasonal charts to see the influence of politics and we compute any other seasonals we can to see if there is an investment influence we can identify that gives you an investment edge. The political seasonals are often excellent help for timing the broader market indices.
This is what Factor Seasonal Analysis all about -- performing extensive analysis to produce an edge to make better investment and trading decisions.
If you have thirty years of price history for a company such as IBM, the political seasonals are just another way of looking at the data to see if politics are important to IBM at all. If not, at the very least taking a subset of politically-the-same years out of the pack to make a seasonal should produce a shape somewhat similar to the regular full history price seasonal, and that's what we like to see to confirm our projections.
We're always looking for confirmation for our monthly forecasts like this. Sign up for our free reports or newsletters to see what factor seasonals can do for you and your investment decisions. The more money you have at risk, the more valuable our services can be.