The 'Presidential Stock Cycle' and 2014

Tomorrow is election day in many states and cities and you might also gird yourself for rocky markets ahead, especially during the first nine months of 2014.

How so? The second year of a presidential term is traditionally a period of subpar stock performance.

The "presidential stock market cycle" says that stocks perform better or worse depending on the year of the president's term. The second year is the worst, and the third is the best, on average.

Specifically, since 1945, the second year of a president's term saw the S&P 500 gain 5.3% in price on average, versus 16.1% in the third, according to an analysis by S&P Capital IQ. No distinction is made between a president's first or second term. The clock simply starts over.

Of course, the figures are averages, so not all years follow the cycle in lock step. Still, the third year sees the index gain 88% of the time; the second year, only 59%.

The second-year subpar performance is actually even worse for the first nine months of the year; losses average 0.5% then.

Why is that second year so bad?

Because that is when the U.S. economy gets less attention from ruling-party politicians, says Sam Stovall, chief equity strategist at S&P Capital IQ, in New York. Mr. Stovall likens the second year to "sophomore slump."

By contrast, "the third year, the year before the election, investors anticipate that the party in power wants to stay in power, so they try to boost the economy," he says. That stimulus tends to carry over into the last, or lame-duck, year. Then, in the first year, the president and the economy tend to get the benefit of the "honeymoon period."

This is no new phenomenon. A 1992 analysis published in the Financial Analysts Journal compared the Dow Jones Industrial Average and the cycle from 1901 through 1990. That data also showed second years were subpar and third years best.

Source:  Simon Constable, Wall Street Journal

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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