Stocks and the Presidency

Investors with a sense of the history of the financial markets have high hopes for 2011. That's because since the 1930s the stock market has generally done best in the third year of a President’s term. MarketWatch's Mark Hulbert, looking at the Dow Jones Industrial Average since 1896, has found that the average Dow return in the third year was 15.5%. In contrast, the first year of a President’s term averaged 8.8%, the second 0.4% and the fourth 4.1%.

Writing in The New York Times about the 65 years since World War II, Floyd Norris observed that third years have had positive returns 94% of the time, with an inflation-adjusted median change in the S&P 500 of 18.0%. That's nearly three times better than the median for the fourth year of 6.7%. The fourth year, in contrast, has been best for growth in the Gross Domestic Product, with above-average growth 75% of the time. Indeed, during this time frame, 62% of all economic growth has happened in the third and fourth years of Presidential terms, just 38% in the first two years.

Unlike the "Super Bowl indicator," the third-year phenomenon is statistically significant, though no one has a satisfactory explanation for it. One popular theory is that Presidents do all they can to have a high-growth economy as they head into re-elections. The table below would seem to bear that out. The table shows total returns for the large companies represented by the S&P 500-stock index.

Develop your own plan
Of course, the real driver of stock market returns is the economy, but growth can be affected by politics. Congress headed off major tax increases set to go into effect January 1. This action, coupled with the “Quantitative Easing” policies of the Federal Reserve Board, may lay a foundation for solid growth this year. However, there is some concern that the ills of the housing market have not been fully resolved as yet. Lingering problems in foreclosures and unemployment could undermine the recovery.

If investing were easy, everyone would be good at it. The record suggests that such is not the case. If you would like an independent review of your portfolio management strategies, we will be pleased to be of service.

Post-war stock market performance in the third year of a Presidential term

Source: M.A. Co.
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