The Mid-term Election Year Cycle: Redux

Many hang their hat on old Wall Street sayings like “As goes the first week of January so goes January” or “As goes January so goes the year”.  Another Wall Street rule of thumb  is the “Mid-year election year” cycle.  A year ago, in “Mid-term Elections in 2010 and the Stock Market“, I wrote about the Election Cycle Power Zone from a firm called Alpha Investment Management. Alpha’s research came up with the following interesting statistics:

“The Power Zone is 15-months long, beginning 30 days before the mid-term elections. This 5-quarter period has not been down since 1931 (Dow Industrials’ Total Return)…..The average return has been 25.5% plus dividends. The average daily return since 1931 has been 7.7 times greater than the average daily gain for all other trading days. A $1,000 investment in the Dow only during the Power Zone (31% of the time) appreciated to $68,200 as of the end of 2009. A $1,000 investment in the Dow during all other trading days (69% of the time) grew to just $1,800 since 1931…..If there is any time to be invested in the stock market, it is this.”

Since the end of the most current mid-term election cycle that began on October 1, 2010 is quickly approaching, it’s appropriate to see whether this rule-of-thumb is true or whether it’s another that has to be thrown into the trash heap because of this unusual and volatile market.

We were savoring the truth of the mid-term election cycle this past April and were confident that the market would soon hit 1430 by year-end, a level that was the rule’s average 25% above the previous September 2010 close of 1141.20.  By the end of this last April, the market had already run up 19.49% to 1363.61; advancing another 6.0 over the remainder of the year to meet the average didn’t seem like to much of a stretch.  But then Europe blew up in our faces .

The market closed at 1131.42 on September 30, 2011, the exact anniversary of the “official” start of the cycle on September 28, 2010, for just shy of a 1% decline.  What had started out looking like a rule-of-thumb with a long history of accuracy was stolen in a brief 4 months by the European financial crisis.

We’re not in the business of predicting but with just 4 trading days left in the Cycle (and the year for that matter), it looks like the recovery since September could bring some respectability back to this rule-of-thumb.  With last Friday’s close of 1265.33, the market was a disappointing 10.9% above where the Cycle began and far short of the average but still higher.

Perhaps the Mid-term Election Year Cycle needs to have a qualifying clause added to it:

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