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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
above 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.
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Postwar stock market performance in
the third year of a Presidential term |
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|
President |
Year |
Total return, S&P 500 |
|
Harry Truman |
1947 |
5.71% |
|
|
1951 |
24.02% |
|
Dwight Eisenhower |
1955 |
31.56% |
|
|
1959 |
11.96% |
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John Kennedy |
1963 |
22.80% |
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Lyndon Johnson |
1967 |
23.98% |
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Richard Nixon |
1971 |
14.31% |
|
Nixon/Ford |
1975 |
37.20% |
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Jimmy Carter |
1979 |
18.44% |
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Ronald Reagan |
1983 |
22.51% |
|
|
1987 |
5.23% |
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George H. W. Bush |
1991 |
30.55% |
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Bill Clinton |
1995 |
37.43% |
|
|
1999 |
21.04% |
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George W. Bush |
2003 |
28.70% |
|
|
2007 |
5.49% |
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Barack Obama |
2011 |
? |
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Source: M.A. Co. |
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