Wednesday, September 20, 2006

The Presidential Election Cycle

[9/20/06 Keith Fitz-Gerald] In case you’re not familiar with it, the Presidential Effect suggests that the second year of any president’s term, regardless of party affiliation, is the least productive in terms of how the financial markets move. Years three and four, on the other hand, are the better performing ones and are typically made possible by all of the free money promises that get made during the election process by both parties. These promises then get translated into market gains.

According to the Stock Trader’s Almanac, the 12-month period beginning in October of the second year of the presidential term has enjoyed average total returns of more than 28%. And since 1933, not a single third year 12-month period beginning in October has registered a loss (the worst return was a gain of 6.6%).

On average, since 1914, the Dow has jumped a whopping 50% from the bottom it hits in the second year to the top in the third year. This bounce ties in with other statistics that show the second and third years of the four-year cycle tend to be the best for stock markets as the party in power gears up for the following year’s election by trying to keep investors happy.

[7/5/06] Martin Zweig makes this observation in the Zweig Fund quarterly report.

"Based on statistics, there may be trouble ahead of the market. According to Standard and Poor's, the S&P 500 Index has lost 2% on average in second quarters of second years of presidential terms since 1945. Third quarters show average losses of 2.2%. Given the historically weaker mid-year trend, we will proceed cautiously."

[3/31/06] as the first quarter of 2006 ends stocks are smack in the midst of what is notoriously the most dangerous year of the U.S. political cycle -- Year Two of a presidential term. Of the 12 declining years endured by the Standard & Poor's 500 Index since 1960, a check of my Bloomberg indicates, six occurred in the second year of a presidential administration. Those included the punishing declines of 24 percent in 2002, 30 percent in 1974, and 13 percent in 1966.

On top of that, we're nearing the part of any year, from the end of April through October, that has gained a reputation as most difficult for stocks. Recall the boardroom adage, ``Sell in May and go away.''

[3/29/06] Liz Ann Sonders takes a look at the current presidential cycle.

[3/22/06] Looking ahead, there is one slight possible negative for the market relating to the presidential election cycle. Statistically, the postelection year and the mid-term year, which we are now in, have not been great years. Based on historical performance, the next pre-election year (2007) and election year (2008) would turn out to be better years according to this cycle.

While we are not strongly supportive of this particular thesis, data going back to 1949 indicates a significant market bottom occurs about every four years. Our last market bottom was in 2002 and it’s possible we may experience the next bottom in 2006. However, we are far from convinced that this will be the case.

-- Martin Zweig in the Zweig Fund annual report

[11/17/04] Several studies purportedly show that presidential elections do indeed affect the stock market and that the best times to own stocks are the two years before an election. Conversely, stocks apparently do not do as well during the first two years of a presidential term. One study, for example, shows that from 1941 to 1995, every bear market but one has occurred in the first or second year of a president's term; none have occurred during the last year, right before an election.

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