The 3rd year of President Obama’s term begins in less than two months. Extensive research has found a stark difference in the average returns for stocks in each year of a typical four year Presidential term. We’ve heard and reported that historically, three’s a charm for markets and the economy, based on every Presidential administration’s focus on keeping the incumbent party in power. It works something like this; Years one and two, the White House Chief Executive “fixes” various excesses and inefficiencies of their predecessor. In year one, the new President can blame a downturn of the other guys. Year two gives him the political luxury of taking all blame for whatever continues to drag economic output downward.
By year three, through monetary easing and cheap money, courtesy of the Federal Reserve Chairman (appointed by the President), stimulus kicks into gear. Markets rejoice, voters are pacified, and happy days are here again…just in time for re-election in year four. Every President who has failed to correctly play this four year cycle has not earned a second term.
Mark Hulbert of the Hulbert Financial Digest (http://store2.marketwatch.com/index1.htm) looked at returns for the Dow Jones Averages dating back to 1896, when the benchmark was created. “Following the lead of some prominent adherents of the Presidential Election Year Cycle, I defined the years to begin at the end of the third quarter.” Using that definition, Obama’s third year begins in less than two months time.
THREE’S A CHARM. 19 TRIES SINCE 1932, AND THE DOW HAS REMAINED BUOYANT IN YEAR THREE
Hulbert’s research for MarketWatch (8-1-2010) confirmed the third year advantage for investors. “The difference between year No. 3 and the other year’s averages is significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine.” Bottom line is this: Regardless of whether the market is over or under-priced fundamentally, government stimulation and intervention eventually lifts all boats like a rising tide. Since 1932, skeptics have tried to talk the market down during a third Presidential term year, and no one has successfully pulled it. Odds will be good that three’s a charm this time around. Just remember that every rising tide eventually goes out again.
FALLEN ANGELS SELECTION
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