Stocks Disappoint on Presidential Cycle

By Tom Lydon

If the S&P 500 ends 2011 in negative territory, it would be only the third time in over 80 years that the U.S. stock benchmark lost ground in the third year of the presidential cycle. The other two instances took place in the 1930s.

Many analysts and observers have tried to link politics with market movements, but the unusually weak market performance this year, during President Barack Obama’s third year in office, does not bode well for equities and stock exchange traded funds next year, according to an S&P strategist.

Looking solely on the correlation of the market with that of a President’s term in office, 2012, the fourth year of President Obama’s term may disappoint investors, Sam Stovall, Chief Equity Strategist at Standard & Poor’s, said in a research note.

The S&P 500 has historically advanced in the third year of a President’s term, advancing on average 15.9% per year since 1945, compared to average gains of around 5% to 6% for the first two and fourth year.

“The political party in power wants to remain in power. Therefore, it will do all it can to push through economically stimulative legislation that will benefit the economy before the following year’s presidential election,” Stovall said. “Since investors are no better than hyperactive first-graders playing musical chairs, they won’t wait until year four to see if the stimulus has worked.”

The weak performance in the third year of a President’s term may portend disappointment for the next year. After each time the S&P 500 posted a third-year price less than 10%, the index dropped an average 10% in the following year.

“If investors believe they have nothing to look forward to, it shows up first in a sub-par third year performance and is then confirmed in a fourth year decline,” Stovall added.