Stocks To Follow History, Big Returns In 3rd Year Of Presidency?

By: John Melloy, Fast Money, Monday, 20 Sep 2010

President Obama needs to make some sort of compromise with Republicans on tax cuts, and most of all, not enact an overall restrictive fiscal policy, in order to avoid being the first American President since Herbert Hoover to have the stock market fall in the key third year of his first term.

From Franklin D. Roosevelt to George W. Bush, the stock market managed a minimum of double digit returns in the third year of their Presidency. President Hoover saw the market drop 47 percent. The third year of the Presidential tenure is usually the best of the four as the bold Commander in Chief, dealing with a typical mid-term election brushback, is forced to enact some sort of bipartisan policy or just stands his ground and benefits from the market-friendly environment of a deficit-freezing gridlock.

What's different with our current President's situation is that refusing to compromise would mean tax cuts on income, capital gains, dividends and estates would expire, amounting to essentially a tax raise. The Obama administration has offered to extend those Bush tax cuts for everyone except for the wealthiest 3 percent of Americans.

Obama more than tripled the 8 percent average return that occurs in the first year of the Presidential cycle, but the gains have stalled as his stimulative policies have taken hold. The S&P 500 is little changed in 2010, swinging from gains to losses.

"To me, by far, the single most important Obama action was Treasury Secretary Geithner's stress test," said Karen Finerman, president of hedge fund Metropolitan Capital Advisors. "Unlike prior administrations who had no clear plan, the stress test laid out a comprehensive plan to secure the banks. This allowed some confidence to return to the market and in fact, allowed private capital to bail out the banks."

Indeed financials led by shares of Bank of America have been among the best performers under Obama's tenure. The S&P 500 financials as a group have returned more than 50 percent since he was inaugurated. Still, many of the investors that supported Obama's previous actions have joined the majority of the country now in believing a bigger compromise is in order on the tax cuts.

A CNBC Poll from Sept. 9-12 showed that 55 percent of Americans believe increasing taxes on anyone will slow the economy and kill jobs.

http://www.cnbc.com/id/39268399