Stocks took it on the chin this past week. In fact, it was the worst week in the run-up to a presidential election Barron’s could find. That’s significant, but it doesn’t mean the collective wisdom of the market is previewing anything about the Trump-Biden race. Investors have other things on their minds, such as rising Covid-19 cases.
dropped 5.6% this past week. The
Dow Jones Industrial Average
fell 6.5%. Tech stocks fared even worse. The Nasdaq Composite fell 7.1% as stock in tech behemoths
(FB) dropped after reporting earnings.
It turns out, it’s more likely the market rises in the run-up to an election than any other week. That’s probably because the uncertainty is ending. Investors hate uncertainty.
The market, on average, goes up about 1% in the week before an election, well above the average weekly return for the U.S. stock market of roughly 0.1%. Slightly above zero makes some sense. Stocks go up over time, but the odds of a positive return in any one week is about 55%, a little better odds than correctly calling a coin flip.
The best week the market had in the run-up to an election came in 2008, amid the financial crisis and recession. The S&P rose 10.5% and the Dow jumped 11.3%.
That’s not the dynamic this year. New U.S. Covid-19 cases total hit almost 100,000 Friday, a new peak. About 9 million Americans have contracted the virus. Europe has imposed new restrictions, and investors are worried similar actions might spread to the U.S.
What about next week? The stock market will probably rise. Because that’s what usually happens after a presidential election. The Dow, for instance, rises about 70% of the time postelection and goes up an average of 1%.
Less uncertainty is the most likely reason for the propensity to rise. But, if the election result isn’t known on Tuesday night, or if Covid-19 cases keep rising, investors can probably throw out the history.
Still, looking at short term stock results to figure out what the outcome of a significant event can be a little like flipping a coin, looking at the results, and using it to predict the next flip.
The stock market isn’t a coin flip. Too much reliance on past market numbers, however, is dangerous for investors who might overreact to hazy signals.
Write to Al Root at email@example.com