Approximately halfway through the month of October and thus far the market has been following historical trends reasonably closely. We have not seen a full-blown bout of “Octoberphobia” yet, and may not, however, as of yesterday’s close DJIA was down 0.9%, S&P 500 was off 1.3% and NASDAQ was at -1.4%. DJIA and S&P 500 have already exceeded their historical
average losses for an election-year October. Beyond election uncertainties the single biggest driver behind current market weakness appears to be the Fed. They did not raise rates at their last meeting, but the minutes of the meeting showed that some members of the board are ready to act this year. According to CME Group’s
FedWatch Tool the current chances of a November increase are just 9.3% while a December rate increase has odds right around 70%. This is still not a sure thing, but it is leaning heavily in favor of higher rates by yearend.
If the Fed does raise rates in December it is quite likely the market will have a reaction similar to last December’s rate increase. Initially there will likely be a sign of relief that the Fed has finally taken action because the economy is perceive to be on solid ground and improving. This could send the market initially higher until reality sets back in and reality is just not as good as the forecasts would like. Yes, the labor market is arguably on stable footing with respectable job growth and the official unemployment rate is 5.0%. But U.S. growth (and global growth) is still tepid. Today’s import/export data from China is just one confirming piece of data.
Following the likely positive initial response to a (potential) December rate hike and the subsequent return to reality, the market is likely to weaken, possibly at yearend and into early next year. This weakness combined with typical early-year, post-election year weakness has the potential to setup a solid rally later on in 2017 especially if Hillary Clinton wins the election. In the next chart DJIA’s performance in post-election years is presented.
![[Post-election DJIA Seasonal Pattern Chart]](/UploadedImage/AIN_1116_20161013_1st_Elected_Seasonal.jpg)
In the above chart, “All Post-Election” years since 1953 is the baseline to which “All 1st Elected,” “Dem 1st Elected,” and “Rep 1st Elected” are compared. “All 1st Elected” years are the first years of a new president. “Dem 1st Elected” are first years of a new president that was a Democrat and “Rep 1st Elected” are new Republican presidents. For the first half of a post-election year all four are quite close. Under 1st Elected Democrats DJIA was weaker in January and February on average as a result of early losses in 2009. By the end of July DJIA’s performance begins to show significant deviation and by the end of the year DJIA has performed best under a newly elected, 1st-year Democrat. Should polls hold and Hillary Clinton become the next President, DJIA’s performance in 2017 could resemble the green line. If Donald Trump can defy odds and polls then DJIA could follow the path of the black line.
In the following table all Presidents and all post-election years since 1953 are listed. “1st Elected” years are shaded in grey and appear separately. These years are then broken down into Democrat and Republican. In total there have been nine “1st Elected” years since 1953, four went to the Democrats and five went to the Republicans. Of the five Republicans only G. H. W. Bush’s first year in office was accompanied by a DJIA gain. Democrats have an opposite record, only Carter suffered a DJIA loss in his first year. The dataset is small, but the differences between a newly elected Democrat and a newly elected Republican in their first year in office are stark. These differences further expand when DJIA data going back to 1897 is used. In this expanded data set DJIA averaged 15.1% under “1st Elected” Democrats compared to just 2.6% under “1st Elected” Republicans.
Seasonal MACD Buy Signal Update
As of today’s close, our Seasonal MACD Buy Signal is still on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ are all negative. In order to issue our Seasonal MACD Buy Signal, DJIA, S&P 500 and NASDAQ MACD “Buy” indicators need to signal a new “Buy” and all in agreement.