The United States presidential inauguration day used to be on 4th March, but in 1937 the Twentieth Amendment changed the date of inauguration day to 20 January. If that day is a Sunday, inauguration day is moved to 21 January.
Has this day had any significant effect on the stock market?
The following chart plots the daily returns for the S&P 500 Index for inauguration day (ID) in the years from 1953 to 2009. Note: the chart only includes inauguration days for first terms (on the grounds that the market most likely knows what to expect with second-term presidents).
As can be seen shares have been weak on inauguration days. Since the 1963 inauguration of Lyndon B. Johnson the S&P 500 has been down on every inauguration day.
The following chart plots the average daily returns for the S&P 500 Index for the trading day before inauguration day, the day itself and the day after.
Since 1953 the average daily return for the S&P 500 on inauguration day has been -1.1%. For the day after ID the average daily return is 0.7%, so there does seem to be a partial relief rally afterwards.
The chart below shows the 4-year US presidential election cycle (PEC) superimposed on the FT All-Share index from 1956. The vertical bars indicate the timing of the November elections every four years.
It can be seen that on occasions the US presidential election has (approximately) coincided with significant turning points in the UK market; notably those elections in 1960, 1968, 1972, 1976,2000, and 2008.
Returns in each year of the PEC
The following chart shows the average annual returns for the FT All-Share Index for each of the four years in the US presidential election cycle. PEC(1) is the first full year after a presidential election, PEC(4) is the election year.
Typically, presidents have primed the economy in the year before elections [PEC(3)] – or, at least, stock markets have expected them to do so.
And the following chart plots the proportion of years that saw positive returns in each of the four years in the PEC.
For the 15 presidential cycles from 1948 to 2008, the FT All-Share Index saw positive returns in every third year of the cycle. But in the two cycles since 2008, the Index has had negative returns in PEC(3).
US presidential election data
For reference below is data on the US presidential elections since 1948.
The 14 charts below show the performance of the FTSE All-Share index over the 12 months of a US presidential election year. For example, the first chart shows the January-December performance of the UK market in 1960, the year John Kennedy was elected President of the United States. The dashed line in each chart indicates the date of the election.
Historically, the UK market tends to rise in the few weeks leading up to the election.
The following chart plots the annual returns of the FT All-Share Index in years of US presidential elections.
What is the effect on equity markets when sovereign debt loses its AAA rating?
The following chart shows the effect on five equity markets when the related sovereign debt lost its triple-A rating.
The date of the downgrade is taken as the first date that the sovereign lost its AAA rating. For example, Moodys downgraded Japan in November 1998 but Standard & Poor’s kept Japan at its highest rating of triple-A until February 2001. In this study the first date (November 1998) is used.
The time period analysed is from two months before the downgrade to 12 months after. The downgrade is announced in week 9 – as indicated by the dotted line in the chart.
The five indices are indexed to 100 at the end of week 9.
In the short term (two months) following the downgrade all the equity markets except Japan performed strongly.
After the first two months, Japan then rebounded strongly, although the French market then suffered a period of weakness.
12 months after the downgrade all equity markets were higher, with an average increase of 17.7% from the time of the downgrade.
An interesting chart (below) in the report shows the proportional equity capitalisations of all major markets since 1900.
According to the report,
In 1900, the UK was the world’s largest equity market, followed by the USA, then France and Germany. Japan was then just a tiny emerging market. Early in the 20th century, the UK was overtaken by the USA, which remained the dominant market throughout, save for a brief 3-year period in the late 1980s, when Japan became the world’s largest equity market. At its peak, Japan accounted for 45% of the total market capitalization of our 22 countries. Then the Japanese bubble burst and, by the end of 2012, Japan’s proportion had fallen to just 8%, while the USA still accounted for 51%.
Fibonacci’s golden ratio seems to be influencing the law of diminishing returns on QE in the US. From Zero Hedge–
Leonardo Fibonacci (1170-1250) may have just stuck his ‘golden-ratio-based’ fork in the equity market’s rally. As the following chart shows, the diminishing marginal utility of Quantitative Easing’s wealth effect has followed a rather remarkable pattern… and today marks the next turning point.
Applying a Fibonacci-based 61.8% retracement level to each of the time-periods following the March 2009 lows, produces a very interesting cycle overlay on the S&P 500 rallies…