| You may have heard about the presidential cycle | | | | Sure it makes sense. The leading theory is that in |
| in stocks. | | | | the first year or two of a president's term, |
| Or maybe you haven't. If not, here it is in a | | | | economic sacrifices are made. Painful decisions |
| nutshell: Stocks do their best in the third year of | | | | come early, such as fighting inflation, cutting back |
| the four-year presidential term-that is, in the year | | | | spending, and even starting wars. New priorities |
| preceding the next presidential election year. | | | | are introduced, fresh ideas abound. But by the |
| Since 2007 is the third year of the current | | | | third year of its hold on the White House, the |
| presidential cycle-the next election will be in | | | | incumbent administration emphasizes economic |
| 2008-let's see whether there's any truth to the | | | | stimuli to gain favor for the coming election |
| presidential cycle, or if it is just an urban myth. | | | | campaign. |
| Various studies have been done on the | | | | Congress-no matter which party holds the White |
| phenomenon, covering different time periods and | | | | House-wants the same thing: to gain favor for |
| using different indexes as proxies for ''the | | | | the upcoming election. Presidential election years |
| market.'' All of the studies are in agreement. The | | | | have the biggest stakes of any national election: |
| presidential cycle is not a myth. Stocks, in fact, | | | | All of the House's seats are in play, along with a |
| have historically done their best in the third year | | | | third of the Senate's seats, and of course the |
| of the election cycle. They have been doing so | | | | presidency itself is up for grabs. Whether the |
| for decades, it doesn't matter what index you | | | | Democrats or Republicans currently control the |
| look at, and the data is not even close. | | | | White House, each party wants to win it. So |
| In fact, the data supports recurring trends for | | | | Congress wants to juice the economy too. |
| each year of the four-year presidential election | | | | In essence, year three is the "setup" year for |
| cycle. | | | | both parties to hit next year's campaign trail with |
| Here is some data. One study used the S&P | | | | their best arguments in place. The incumbent |
| 500 and the time period from 1952 to 2003. The | | | | party wants voters go to the polls with jobs and |
| results were that the average annual total return | | | | a feeling of economic well being. The party out of |
| for the market has been about 6 percent in year | | | | power wants to have an economic record that |
| one of the presidential cycle (that is, the first | | | | they can argue is even stronger than the |
| post-election year), 8 percent in year two, 23 | | | | incumbent party's. |
| percent in year three (the pre-election year), and | | | | Will the cycle repeat itself in 2007? Well, we've |
| 11 percent in year four. Returns from the most | | | | had the capture of both houses of Congress by |
| recently completed cycle just about matched | | | | the Democrats, who will set the congressional |
| those numbers: year three (2003) produced a gain | | | | agenda for the next two years. But the White |
| (in the S&P) of 26 percent and year four | | | | House is still controlled by the Republicans. Does |
| (2004) produced 9 percent. | | | | that equate to uncertainty, which is historically felt |
| Another study covered the years 1889 through | | | | to be an enemy of a rising market? Or does it |
| 2005, also using the S&P 500 (and its | | | | just mean stalemate, which is not usually felt to |
| predecessors) as the proxy for the market. Its | | | | be a bad thing for the market? |
| conclusions were that returns were about 3 | | | | Only time will tell. But in the absence of a |
| percent in year one, 3 percent in year two, 11 | | | | compelling negative event on the horizon (I don't |
| percent in year three, and 8 percent in year four. | | | | see one), or compelling negative current data (as |
| The same study also looked at the data from | | | | you might have if the market were wildly |
| another angle, measuring the percentage of years | | | | overvalued, which it is not), the long-time pattern |
| that the market was up for the year. The result: | | | | very strongly suggests that 2007 will be a good |
| The market was up in 57 percent of year one's, | | | | year for the stock market. After all, the historical |
| 55 percent of year two's, 79 percent of year | | | | data itself covers election cycles in which there |
| three's, and 73 percent of year four's. | | | | were all kinds of economic conditions and every |
| Other studies support the strong-year-three | | | | combination of party control of the White House |
| indicator: Since 1945, the S&P has gained an | | | | and Congress. The clear pattern of strong returns |
| average of 18 percent in the third years of | | | | in year three has emerged from all those varying |
| election cycles, compared with an average of 9 | | | | conditions. |
| percent in all years. Year three has not had a | | | | Let's hope that this year three of the cycle, 2007, |
| down year since 1939. And so on. | | | | matches the last year three, 2003, when the |
| Clearly, there is a pattern. Does this make sense, | | | | market returned 26 percent. That would be |
| or is it a mere a statistical accident? Do political | | | | something that all stock investors could celebrate. |
| considerations affect the stock market? | | | | |