There is a good chance that the U.S. stock market will do even better in the months before November 8.
Based on the average monthly returns of the Dow Jones Industrial Average (DJIA) since it was founded in 1896, the chart below shows the historical trends. If you look closely, you’ll see that the Dow’s average return is higher in each of the five months before Election Day, from June to October. These months are not election years.
The differences are especially big from the end of summer to the beginning of autumn. September is especially interesting because, on average, it’s the worst month for the stock market. In election years, however, the Dow actually makes a small gain in September, while in all other years, it makes a big loss.
The most likely reason for the market’s rise during election years is that the party in power wants to keep control and will do everything it can to send the stock market through the roof as Election Day approaches. The election year boost to the stock market usually happens no matter what party is in power.
Many people on Wall Street don’t know about this strength a few months before Election Day because they only pay attention to presidential election years. The chart shows that the fourth year, which we are now in, is not special because the Dow’s average gain is almost the same as the average gain for the whole year. You can only see how the stock market is moving in the few months before Election Day by focusing on shorter time frames.
It’s important to remember that a strong stock market before an election is not a guarantee. Since the Dow was first made 32 years ago, the stock index has gone up 23 times between June and October, which is 72% of the time. On the other hand, the Dow has gone up 64% of the time over every five-month period since 1896. If the market was strong before the election, the chances of it going up go from about 5 out of 8 to 3 out of 4. At the 90% level, this rise in average strength is statistically significant, but not at the 95% level.
Better odds of being strong are better than nothing. For the next few months, you might want to give the stock market even more of a chance.
