Market Stats Point to Election Honeymoon

JESSE LIVERMORE FAMOUSLY remarked that there was a time to go long, a time to go short and a time to go fishing. This year is proving to be one best spent fishing.

So far it's frustrated almost all investors in the credit, commodity, stock and foreign exchange markets. As I've argued in the recent past, the political and regulatory uncertainty has created an erratic environment with little sustained momentum. Given the likelihood of a Treasury-led bailout of Fannie Mae (FNM) and Freddie Mac (FRE) in the coming weeks, the clouds seem set to linger.

If you're still on the sidelines regarding the presidential candidates, consider their differences on taxes. Barack Obama generally aims to raise taxes on the rich to finance tax cuts and social programs for lower income earners. John McCain's plan is to maintain the Bush tax cuts and cut corporate taxes from 35% to 25%, theoretically increasing investment and boosting job growth.

As reported in this weekend's Barron's, Obama's plan would increase the average tax bill for the top 1% of income tax payers by $93,709, to $652,890. Obama has not hid from his intention to push more of the tax burden onto the highest earning Americans, telling a debate audience in early 2008 that the he's "not bashful" making the wealthy shoulder even more of the tax burden. The senator counts Warren Buffett, Bill Gates, Steven Spielberg and Paul Volker among his supporters.

Whatever your views, take comfort in the knowledge that historically stock markets tend to perform well during the transition period at the end of a two-term presidency. According to statistics from Markethistory.com, the S&P 500 has rallied in four of five such cases, jumping an average 10.5% in the 58 days following the election. The exception was the disputed election in 2000, when the S&P 500 fell 4% amid lawsuits and charges.

It helps that they hold elections in midfall, when the market tends to perform better anyway. The S&P 500 has rallied over the 19 trading days before each of the elections replacing a two-term president, jumping an average of 2.5%. Stats for the Dow are similar, with the blue chips rallying 85% of the time ahead of such elections, rising an average of 3%, and sporting a similar winning percentage for the 62 days after the election, good for an average gain of 6%.

The first year of most presidencies tends to be good for the financial markets. According to data from Bespoke Investment Group, the first year of a presidency yields an average stock return of 5.4%, and average gain for the U.S. dollar of 0.90%, a drop of 0.23% in the 10-year yield and a slight 0.77% drop in commodity prices, except oil, which has historically risen.

Of course, presidential policies have long-ranging implications that are not subject to term limits. Fannie Mae (FNM), for example, was created in 1938 as part of FDR's New Deal and is just now in the process of imploding, likely taking a big chunk of taxpayer dollars along with it.

Investors keeping an eye on the health and medical sectors might want to check out Volcano Corporation (VOLC), one of a handful of medical-equipment manufacturers who've shown solid relative strength in recent weeks. The stock is up sharply from July lows and seemingly posed to revisit the upper end of the range it carved out last year.

The company produces devices for the diagnosis and treatment of heart disease, which is the leading cause of death in the United States accounting for nearly 40% of all deaths — one every 33 seconds. Unfortunately, this is a growth business. Patients and investors are likely to be well served by Volcano's advances in the field.