The election day is just 11 days away, thank goodness. As it nears, articles and reports are appearing about the election’s impact on the market. We’re going to discuss the data in the November Stock Superstars Report, which will be posted online Friday evening, but I’ll share some of the data here as well. Rather than repeat what we’ll say in the SSR monthly report, I want to focus on sample size and our tendency to look for patterns—important concepts to keep in mind when reading commentary about how the presidential elections may influence stock market returns.
By sample size, I am referring to the amount of data analyzed for purposes of this discussion. We have a lot of data regarding anomalies such as valuation, momentum, company size, etc. The data not only goes back decades, but it also covers a variety of market and economic conditions. We also have defensible reasons to explain why they exist. Value stocks outperform because their prices reflect too much pessimism; small-company stocks benefit from less attention and a higher propensity to be mispriced, etc.
We have far less data when it comes to the impact of presidential elections. Yes, presidential elections have been conducted for over two centuries. The problem is that the data for analyzing the impact of elections on the financial markets is limited. Ned Davis Research’s analysis goes back only to 1900. This limits their election analysis to just 29 presidential elections. (The current election would be number 30.) Analyses based on post-World War II data, such as that conducted by Sam Stovall of CFRA, covers only 17 presidential elections. As you can see, the samples are not very big.
More on AAII.com
- Using Seasonal and Cyclical Stock Market Patterns – The presidential cycle, in which stocks perform differently during each year of a president’s term, is just one of the patterns tracked by Jeffrey Hirsch.
- 15 Short-Cuts and Biases That Lead to Bad Investment Decisions – Sample size insensitivity is one of the 15 problematic thought processes singled out by portfolio manager Paul Szczygiel in this article.
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Highlights from the AAII Journal
- What You Need to Know About Bond Yields to Determine Your Returns – Measures beyond current yield can help you make better investment decisions.
- Focus on the Value of a Business, Not the Stock’s Valuation – Ariel fund manager Rupal Bhansali explains why intrinsic value is a better measure of a stock’s potential than market value.
AAII Sentiment Survey
Optimism is below 30% for the 10th consecutive week and remains at an unusually low level. More about this week’s results.
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The Week Ahead
It’s going to be another busy week for earnings, with 130 members of the S&P 500 scheduled to report. Included in this group is Dow Jones industrial component Pfizer (PFE), on Tuesday.
The Federal Open Market Committee will hold a two-day meeting starting on Tuesday. The CME’s FedWatch Tool currently assigns a greater than 90% chance of interest rates remaining unchanged. The statement will be released Wednesday at 2:00 p.m. ET and will be scrutinized for any suggestion of a rate hike occurring at the December meeting.
Elsewhere on the economic calendar, September personal income and the October Chicago Purchasing Manager’s Index (PMI) will be released on Monday. Tuesday will feature October motor vehicle sales, the October PMI manufacturing index, the Institute for Supply Management’s (ISM) October manufacturing index and September construction spending. The October ADP Employment Report will be released on Wednesday. Thursday will feature preliminary 2016 third-quarter productivity, September factory orders and the ISM’s October non-manufacturing index. October jobs data—including the unemployment rate and the change in nonfarm payrolls—as well as September international trade will be released on Friday.
Two Federal Reserve officials will make public appearances on Friday: Atlanta president Dennis Lockhart and Dallas president Rob Kaplan.
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