[Editor's note, December 27, 2016: The charts have been revised since original publication]
The post-U.S. election rally slowed this week on over-bought conditions. The Dow Jones Industrial Average has been unable to attain the symbolic level of 20,000 (coming just 13 points shy), as sellers have chosen to defend this level. As we move into January, attention will turn to what policies the new U.S. president actually enacts after inauguration. Donald Trump has already promised, within his first 100-days, withdrawing from the Trans-Pacific Partnership (TPP), renegotiating NAFTA, lifting restrictions on shale and clean coal production, canceling climate change agreements, passing a tax relief bill, repealing Obamacare, requiring two existing regulations be eliminated for each new regulation passed, and passing various measures to clean up corruption in Washington. The nearly 10% rally on the Dow Jones Industrial Average (NYSEARCA:DIA) since election week reflects markets pricing in some of Trump's pro-business promises (while ignoring his concerning, protectionist economic policies). As always with markets, equity prices are forward-looking and the current rally now reflects much of the pro-growth promises that Trump has been making. The honeymoon period will be coming to an end in a few weeks and markets will see if promises meet reality once Trump gets to work. Moreover, even if the new president manages to carry out his promises, markets may not rally further, as much of Trump's program is being priced-in already. It may take positive surprises, going beyond what has been promised or seeing rapid implementation of policies, to generate more equity rally on the Trump/growth theme. On the other hand, any Congressional resistance to Trump's program would bring equities down.
The anticipation of a new president has traditionally provoked rallies in U.S. equities, as financial institutions sell the message of the new president as a reason to buy equities. We looked back at the period from election day to inauguration for all first-term presidents since World War II. With the exception of Obama (who took office during the Financial Crisis), the S&P 500 was higher for all other presidents during this period. What happens after the president get to work is another story.
In this Commentary we look at the performance of the S&P 500 (NYSEARCA:SPY) for each post-war president in the period leading up to the new president's inauguration until the much-publicized first 100-days. Each president's promised agenda and actual accomplishments in the first 100-days differ, and we don't look at the details of the success/failure of presidents' first 100-days here. However it is instructive to observe how markets have behaved both in anticipation of the new president and in the wake of the inauguration. We cover all the first-term post-war presidents below.
Obama's poor pre-inauguration period reflects more the beginning of the Financial Crisis than lack of enthusiasm for his policies. Post inauguration the S&P 500 was choppy but higher after 100 days.
George W. Bush
Bush's case is interesting as he took office at the peak of the Tech Bubble. It is not unlikely that Trump is coming to power near the peak of the Central Bankers' Bubble. Bush enjoyed a post election bump higher but selling on his inauguration. His first 100 days were positive as this period corresponded to the last peak in the Tech Bubble.
Clinton got a nice rally into inauguration, but the rally stopped there. The market had priced in the "Clinton hope".
George H. W. Bush
The elder Bush did not see a post-election equity bounce, but equities rallied after inauguration.
Policy-wise, Reagan's supply-side agenda most closely mirror's Trump's program. Reagan also saw a robust equity rally through election day then a major sell-off during his first 100-days. A key difference in the Reagan case relative to Trump is that equities were not at a major cycle peak in 1980.
Carter enjoyed an equity rally from election day until 100-days out. Curious, given how history has judged poorly his economic policies.
Nixon got the ubiquitous post-election bump, then sell-off around inauguration.
Similar to Carter.
Post election bounce followed by an equity sell-off.
The strong post election rally for Ike resembles closely what we have seen thus far for Trump. Will we see this Trump rally top out near inauguration day also, as the reality of a Trump presidency sets in? One interesting corollary we see with Republican presidents who enjoy strong honeymoon equity rallies (Reagan, Nixon, Ike) is the presence of a sell-off post-inauguration.
Composite S&P 500 Path
We aggregated all the above cases to give the mean path of the S&P 500 from election day to 100-days into the new president's term. While markets have tended to get excited about a new president's policies from election day, equity prices discount rapidly, before inauguration, the optimism for the new president's program. Performance 100-days out from inauguration is, on average, flat. However we should not expect a continuation of the one-way move higher.
Optimism for Trump's pro-growth policies is now incorporated into equity prices. Buying or holding onto U.S. equities based on news well-know to everyone is not an optimal strategy. Risks of disappointment are relatively high post-inauguration as Trump comes to Washington as an outsider and will face a potentially hostile Congress. Any signs that Trump's agenda is running into roadblocks will be reason to sell equities in 2017.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.