What do post-election rallies say about future returns?

Another day, and the Trumpflation theme keeps on rolling.  Equities go up up seemingly every day, US back end yields are at eighteen month highs, and the dollar keeps on rolling against the other two member of the G3.  The strength in USD/JPY is particularly impressive, fueled, no doubt, by expectations that the BOJ will step in to defend its JGB yield target. 

Still, Macro Man does wonder if tactically, at least, certain aspects of the post-electoral landscape aren't getting a little long in the tooth.    Consider that speculative short interest in eurodollar futures is at an all time high:

as is duration-weighted positioning in US bond futures.  The indicator below is expressed in 10y future equivalents.   It doesn't include the ultra future, which is only a few years old, but the recent picture with that contract included looks much the same.

USD/JPY, meanwhile, is heading straight for the neckline that was such good support for more than a year.   Now, of course, it should present formidable resistance.

Record levels of fixed income shorts and the dollar about to hit a technical headwind just before a key policy meeting.   Gee, what could possibly go wrong?

More generally, however, Macro Man thought it would be useful to put the current post-election rally into context, and to see if there were any lessons to be learned about potential future price action.  Does a strong post-election rally bode well for future gains?  How does the current 5.4% rally in the SPX stack up with history?  Inquiring minds want to know.

Macro Man looked at every election since 1896 and tracked the performance of US equities between election day and inauguration day, and then for the one year following inauguration day.   He used the S&P 500 when data were available, and the Dow in the pre-SPX days.   One thing to note is that before the 1936 election, inauguration day was March 4, having been moved to January 20 after FDR took office in 1933.  It turns out that there is relatively little relationship between the post-electoral price action and equity returns in the first year of office, with a correlation coefficient of -0.18.   Yes, it's negative, though that's partially a function of a couple of notable outliers.

Still, it's hardly a ringing endorsement for the notion that just because the market rallies (or sells off) after the election, it will continue doing so when the new guy takes office.  The individual electoral datapoints are set out in the table below.

As you can see, the Trumpflation rally is already quite a bit bigger than average, though there have been post-war rallies that have been bigger (Clinton, JFK, Ike.)  Then again, we're only halfway between the election and the inauguration; if the market keeps this up, it will be the biggest post election rally since Hoover.   Gulp.

It is interesting to note that new presidents tend to see higher-than average equity returns for their first year in office, though it's also the case that they tend to see the market go down after they're elected.   (Perhaps this is because of either a poor economy that gets the incumbent chucked out or uncertainty after a popular two-termer leaves?)  Note also that there is a much bigger gap between post-election and post-inauguration performance for Democrats than there is for Republicans.   When you add it all together, however, the market has tended to perform a bit better between election day and the end of the first year of a term for GOP presidents than their Democratic counterparts.  That being said, the margin isn't big enough relative to the sample size to offer any substantive conclusions.

Ultimately, what we can say is that post-electoral performance is no guarantee of future returns, or even a reasonable predictor.   Enjoy the Trumpflation rally,  but understand what it means (and what it doesn't mean) for the future.