There is a group of market analysts who believe that overall market performance is largely tied to a presidential cycle. In other words, how Wall Street acts is based on whether it is the first, second, third or fourth year of a president’s term. If you would like to find out more about it, do an Internet search for information on the “presidential cycle theory” and you can find all sorts of information.

I don’t totally buy into the idea of a rigid presidential cycle, but certainly the selection of a president is a significant worldwide event. As such, it can have a major impact on the financial markets.

One thing Wall Street and the financial markets dislike is political and economic uncertainty and a presidential election has the potential to produce plenty of both. The last time the U.S. had a presidential election without an incumbent was in 2000, when George Bush was campaigning Al Gore. If you remember, it was a very close race and the outcome wasn’t fully decided until several days after the November vote.

Below is a chart of the Dow Jones Industrials Average over the past decade. You can see that the market sold off sharply in early 2000 while the campaign was in full swing. For the rest of the year the markets seesawed. Of course there were many things taking place and it would be inaccurate to attribute all of the volatility to the election, but certainly it played a major role.

Of course the Dow was the most stable of the major indices. A chart of the Nasdaq or the S&P 500 during this time would show much greater volatility.

Interestingly, with all the trouble in the real estate sector and with the price of oil at all-time records, the sell-off we have seen since the end of October is comparable to what occurred in the first quarter of 2000. And once again, we are facing a presidential election where there is no clear-cut favorite. Just as events in 2000 produced major market swings leading up to the election, I would not be surprised to see that happen in 2008. But I do not think we can see a bull trend re-established until after the election is decided and we see the new president unveil plans for the economy.

As a result, watch for the bears to control the market for the rest of this year and into the first part of 2009. We’ll see some rallies along the way, but the major trend will be sideways or down.

Have a great weekend.
F.S.

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