Imagine that Investor #1 had consistently purchased the S&P 500 Index 27 months before presidential elections and had sold near election time on December 31 of the election year. (last example buy early August 2014 )
Because a 27-month period seems to provide better returns than other studied periods before the election, a 27-month period was selected for this test.
This strategy kept Investor #1 out of the market from January 1 of the inaugural year through September 30 of the second year during the test period.
On the other hand, imagine further that Investor 2 bought the S&P 500 on the first trading day of the inaugural year of each presidential election during the test period and liquidated the portfolio on September 30 of the second year of the presidential term.
Would either or both of these simple procedures have consistently made money for the investors? The findings are extremely interesting.
Investor #1 put up money 13 times and did not lose money in any period. Gains ranged from a high of 70 percent prior to the 1976 election to a low of 16 percent before the 1960 election. Investor 1 saw the original investment of $1,000 grow to $72,701.
This is a percentage gain of 7,170 percent.
Investor #2 was not so fortunate. This individual also anted up 13 times, but lost six times. The largest loss of -36 percent was seen after the presidential election of 2000. Investor 2 saw the original $1,000 shrink to only $643, or a loss of -36 percent, in nearly five decades. That percentage is based on nominal dollars and does not include the impact of inflation.
Graphing the percentage gain and loss makes the difference quite obvious.,.
and the January effect
When the S&P500 has a net positive gain in the first five trading days of the year, there is about an 86% chance that the stock market will rise for the year, it has worked in 31 out of the last 36 years (as of 2006). The five exceptions to this rule were in 1966, 1973, 1990, 1994, and 2002. Four out of these five years were war related, while 1994 was a flat market. As history suggests, the markets average nearly 14% gains when the January Effect is triggered.
On the flip side of the coin, when the first five days of January are lower, there is no statistical bias of the market, up or down. It is anyone’s game at that point Not a very reliable indication.