We look at how 4 US stock indices DJIA, DJU, DJT and IXIC performed in 2000 which was an election year for the 43rd President of the United States to attempt this very commonly asked trading question ‘Will the stock market fall in an US Presidential Election Year?’ There is a popular belief that a highly secretive group or ‘invisible hand’ known as the ‘Plunge Protection Team’ aka ‘Working Group on Financial Markets‘ will hold the market up. Whether such a group exists anymore and until they come forward we will never receive a definitive answer. The market however should provide clues for each trader to make up his mind.
What DJIA, DJU, DJT and IXIC did in 2000
Let’s look 2000 which was the year George W Bush was elected 43rd US President:
- 2000 was an election year. Although the Dow Jones Industrial Average (DJIA) closed down only 6.2% that year, Nasdaq Composite fell 41%.
- Despite a 6.2% correction is not a lot, intra-year high to low was a hefty 17.8% loss. In fact the lowest point in the DJIA was printed on 18 October 2000 just as the election was entering it’s climax.
- One of the signs of a jittery stock market is a flight to the relative safety of utility stocks. Dow Utilities (DJU) index was up 45.56% in 2000.
- Another sign that the stock market was unstable was divergence among key indices: Dow Jones Industrial Average was down 6.2% for the year, Nasdaq Composite (IXIC) lost 41%, Dow Utilities was up 45.56% and Dow Transportations (DJT) was down 1%.
- A third sign of market that is not sound is volatility. Despite Dow Transportations seeming stability, it’s high low range in 1999 was 40.6%! Tell me how an investor is going to sleep soundly through that kind of movement!
- If the US stock market was not allowed to crash in 2000, then obviously that was just a delaying tactic because Dow Industrials, Dow Utilities and Dow Transportations crashed mightily in 2001.
How the same indices trade this year
Let’s look at what we went through so far in 2016:
- Dow Jones Industrial Average is up about 6.2% year to date (on 27 July 2016).
- 2015 – 2016 high-low range was a rather big 16.2%.
- Nasdaq Composite is up 4% year to date (on 27 July 2016) but the 2-year high-low was also a hefty 19.54% loss.
- Dow Utilities is up 24.14% (on 27 July 2016); I hope you didn’t miss this sign which I see as a classic ‘flight to safety‘.
- Dow Transportations is up 6.53% (on 27 July 2016) which is nice but the high-low volatility was >30% loss at one point.
- All three signs of instability that we saw in 2000 are present here – volatility, flight to safety and then divergence between the indices.
What other numbers are saying
Maybe there will be a crash this year, may be not because US Presidential Election is coming. Now I am not making a forecast – 1. I am just a guy who believes that markets cannot rise forever and 2. history repeats. So based on these beliefs, I am going to tighten my own seatbelt and put on the safety helmet.
I have just posted this article from ElliottWave International that says real GDP per capita in the US just fell to lowest in more than 75 years. Please take a look.
Also forget about those unemployment rates that are being tweaked all the time. This is a chart from the Worldbank which shows US labour participation lower than 1990.
Note: US 1990 population census showed total population at 248.7 million. 2010 population census showed 308.7 million people. Has the US become an exceptional society where people don’t have to work while the economy and stock market continues to grow?
Coming back to title, so will market fall or not?
I don’t think that such a question can be addressed with a Yes/No response. Definitely the market action this year appears unbelievable – despite the kind of blows received in January when China stock indices limit down leading to a global meltdown or after Brexit – that somehow the market recovered with the Dow Jones Industrial Average going on to print a new 52-week high. On the other hand, the evidence is clear that an election in 2000 certainly did not prevent the Nasdaq Composite from crashing and an election this year certainly did not prevent the Dow Transportations index from crashing more than 30% at one point between this year and last. In fact if there is a Plunge Protection Team to lift the market up, then be very careful because it appears also that the team will take away it’s support after the election.
It is my opinion that no trader should be operating in the market based on an unproven belief. Whether an invisible hand will save the market or not, each person should take care of his own risk and can only accountable to himself.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."