Impacts of Presidential Elections on the

U.S. Equity Market

By Christopher Diodato, CMT

November 3, 2016

Emotions have been running high in the United States with the upcoming presidential
election. When voters go to cast their ballots on November 8th, they will be choosing between
two of the most controversial candidates in recent history. On the Republican ticket is real estate
mogul, Donald Trump. Running for the Democratic Party is long-established political figure,
Hillary Clinton. Americans, on the whole, are not particularly enthused by either of the
candidates, with the percentage of Americans with an unfavorable opinion of both well over
50%. As such, investors may be concerned with the election’s implications on their investments
in the stock market. In this report, we look back on some of the most contentious and closest
elections in modern U.S. history and observe their effects on the stock market.

The goal of this report is to analyze elections and their implications on the stock market
and discover if elections spark new longer term uptrends or downtrends. Our method of analysis
may be considered non-traditional by some, as it places minimal importance on the presidential
candidates’ personalities and political platforms. Instead, we focus on the market forces of
Supply and Demand. At Lowry Research, we believe the Law of Supply and Demand is the
foundation of all economic analysis, and is the most powerful method to analyze the stock
market. In accordance with this belief, we created the Buying Power and Selling Pressure
Indexes in 1938 to measure trends in Supply and Demand and still use these Indexes today.

1948 – Harry Truman Vs. Thomas Dewey

Nearly 70 years ago, people still recall the picture of a smiling Harry Truman holding up
the Chicago Daily Tribune which said on the front page “Dewey Defeats Truman.” Of course,
Truman was grinning because he, in contrast to what the Tribune said, had won. Prior to the
election, he had faced years of opposition from his own party and polls were showing he would
be a clear loser in the election. How did this surprise outcome impact the stock market?
 The DJIA made its final bull market peak in June of 1948, and in November, just before
the election, tested its June high. To an investor looking only at the DJIA, this test may have
looked like the beginning of a new upleg in the bull market. The deteriorating balance between
Supply and Demand said otherwise, however, as Buying Power was in the midst of a steep
downtrend which was met with a steep uptrend in Selling Pressure. These trends indicated the
market was in a bear market which was not going to end anytime soon, regardless of the election
results. As such, following the election, prices continued lower until June of 1949, right before
we observed a substantial improvement between Supply and Demand. These improvements
caused a Buying Control #1 to be registered on June 21st, 1949, and a Buying Control #2, to
confirm the first buy signal, on July 26th. What followed was one of the longest bull markets in
modern history.

1960 – John Kennedy Vs. Richard Nixon

The electorate was evenly split in their support of John Kennedy and Richard Nixon, with
John Kennedy winning the popular vote by just under 120,000 votes. This was the narrowest
margin of victory, as measured by the popular vote, in history. The key issues focused on the
economy, which was in a recession, and the Cold War, which was becoming more of a
geopolitical point of contention by the day.
 Following the election, the market steadily trended higher for the next year. The uptrend
wasn’t the result of the election, though. It was simply a continuation of the uptrend already
established in October of 1960. The prevailing trends between Supply and Demand had been
improving since September, two months earlier. Since then, and through the election, the
negative spread between Buying Power and Selling Pressure was contracting. Additionally, in
late-October, a 90% Downside Day (registered when both Points Lost and Down Volume are
both 90% of their respective totals on a given day) occurred just as the market was testing its
September low. In another research report from Lowry Research, Identifying Bear Market
Bottoms and New Bull Markets, the registration of a 90% Downside Day after a prolonged
decline can often result in an exhaustion of Supply and, once signs of powerful Demand appear,
a sustainable longer term advance.

Nevertheless, by November 10th, 1960, the trends between Supply and Demand had
improved to the point to register a Buying Control #1. Confirming this initial intermediate term
buy signal, on December 28th, Buying Power had crossed above Selling Pressure, registering a
Buying Control #2. Following the second buy signal, the DJIA climbed over 19% during the
next twelve months.
1964 – Lyndon Johnson Vs. Barry Goldwater
Less than a year after John Kennedy’s assassination on November 22nd, 1963, newly
inaugurated Lyndon Johnson was already up for election. Johnson, largely as popular as his
predecessor, may not have been as concerned about opposition from the Republican candidate,
Barry Goldwater, as turmoil from within his own party. Before Johnson was able to run for
president, he had to defeat his opponent in the primary election, George Wallace, who was
adamantly against the civil rights movement. After Johnson defeated him, one of the Democratic
party’s major concerns was losing the pro-segregation states in the south to Goldwater, which
could potentially give Goldwater the election. As such, a potentially close election was
expected.

Despite the concerns, the final outcome showed Johnson handily defeating Goldwater.
Following the results, there was only minimal market volatility and scant indication a new major
uptrend or downtrend was starting. Thus, those looking to “trade the election” were likely
disappointed. However, investors who were monitoring the forces of Supply and Demand could
see that, with Buying Power consistently in the dominant position above Selling Pressure during
1964, a longer term bull market was in play – and moreover, that this bull market most likely had
longer to run. Over the next six months, the DJIA climbed over 7%.
 2000 – George W. Bush Vs. Al Gore
Chatter about the 2000 election still crops up every now and then here at Lowry
Research’s headquarters in Palm Beach County, Florida, as Florida proved to be the state which
would put George W. Bush into office. The margin of victory in the state was so slim, in fact,
there had to be a recount. After the recount indicated Bush won by just a hair, the Florida
Supreme Court ruled 70,000 previously rejected ballots needed to be counted. The final result
was unknown until December 12th, when the Federal Supreme Court ordered the initially
certified voting results, making Bush the winner, to hold. With the final outcome of the election
delayed for over a month past Election Day and holding investors in suspense, “surely” a new,
long term trend developed in reaction.

Again, despite the tensions surrounding this election, the most volatility following both
Election Day and the Supreme Court ruling was short term in nature. Prior to the election, the
prevailing uptrends in Buying Power and Selling Pressure were reflecting a bifurcated market – a
bull market in “dot-com” stocks and a handful of mega caps, and a bear market in the rest of the
market. Even so, Selling Pressure remained in the dominant position above Buying Power,
reflecting an environment in which buyers would have a difficult time pushing prices to new
highs. And, as we now know, the challenge proved too much for buyers, as sellers eventually
dragged the DJIA, S&P 500, and NASDAQ Comp. into a fierce, three-year bear market.
 2016 – Hillary Clinton Vs. Donald Trump
Drawing conclusions from our previous examples, what we find is that the results of
elections may cause some short term market volatility, but prove of little significance in
determining the future, longer term trend of the market. What commands the longer term trend
of the market, regardless of the outcome of an election, are the prevailing trends between market
Supply and Demand prior to the election. As such, the November 8th election between Hillary
Clinton and Donald Trump may cause some short term volatility, but the prevailing forces of
Supply and Demand will eventually reassert the longer term market trend. So, already
understanding there may be some short term volatility after Election Day, what should investors
expect the trend to be thereafter?

The main themes for 2016 have been contracting investor Demand and relatively stagnant
investor Supply. The wide, negative spread between Buying Power and Selling Pressure
highlights the market’s potential vulnerability over the longer term, but those vulnerabilities
likely won’t be realized unless Supply begins to rapidly expand. Our Selling Pressure Index
touched its 2016 high at 277 in February, May, and November, but the Index never fully
reestablished its uptrend which started in April of 2015.
 Where does this leave us now, with less than one week until the election? Selling
Pressure has been trending higher over the past six weeks and may attempt to break above the
key 277 level. A sustained cross above this level prior to the election would likely forewarn of
some potentially longer term weakness. If Selling Pressure reverses down sharply prior to the
election, though, it would indicate an improving longer term balance of Supply and Demand. As
such, it will be imperative in the coming days to monitor Selling Pressure, for it will likely give
us clarity as to, once any short term volatility subsides, the eventual direction of the longer term
market trend.

For any further questions regarding our analysis of market Supply and Demand, or to request
a free trial subscription to our research, contact us at Lowry Research at (561) 799-1889 or
visit us at LowryResearch.com.