North American equity markets in 2012 are expected to follow traditional trends established during a U.S. presidential election year. The potential for stock market profits are significant for investors who are willing to play swings related to the election. Below is a chart on the Dow Jones industrial average showing relative seasonality since 1930 during U.S. Presidential election years:
North American equity markets are expected to move higher into mid-January in anticipation of strong fourth-quarter earnings. Consensus estimates for S&P 500 companies show earnings gains on a year-over-year basis of 9.9 per cent. Earning gains by TSX 60 companies are expected to average 13.1 per cent. Investors, who purchased ETFs with favourable seasonality near the beginning of October, will want to take profits into strength during this period.
A brief correction into February during the fourth-quarter earnings season will provide a buying opportunity in selected sectors for a recovery into April. The correction will correspond with the reporting of negative first-half earnings guidance by international companies triggered partially by anticipation of negative currency translation related to a strong U.S. dollar. A slowdown in European economic growth also will contribute. Developments in the Middle East and particularly Iran are expected to influence. The strongest sector during this period is expected to be energy. Its period of seasonal strength is from February to May. Possible ETF investments include Energy SPDRs in the U.S. and iShares TSX Energy Index and the Claymore Oil Sands ETF .
A more serious correction in equity markets will appear in April and May when the Republican candidate for the presidency becomes apparent and political rhetoric ramps up. Political uncertainty will prompt economic uncertainty and will trigger lower equity prices. International companies are unwilling to make major capital commitments until they project the political agenda of the next U.S. Administration. Cash is king during the corrective phase.
Potentially the best upside move in 2012 will appear from the end of June to the beginning of September. The caveat to the move is anticipation of a victory of the presidency by the Republican candidate and anticipation of a corresponding swing of the political agenda to the right. The last time this scenario occurred was in 1980 when Ronald Reagan defeated Jimmy Carter. The S&P 500 Index gained 25.8 per cent that year. Economically sensitive ETFs in the industrial, technology, consumer discretionary and energy sectors are top choices during this period. On the other hand, anticipation of a re-election of President Obama will significantly reduce possibilities of a summer rally. An added factor is a likely recovery in China this summer following a series of monetary stimulations by Chinese authorities. Greatest positive impact under this scenario is on the materials sector, including the precious metals sub-sector. The top ETF pick for investing in China during this period is iShares FTSE China 25 Index Fund .
Over-anticipation of a Republican president could lead to a brief correction from the beginning of September to the end of October, followed by a year-end recovery in sectors that will benefit from the President's new mandate. Economically sensitive ETFs with positive seasonality are top choices from late October to the end of December.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/