Friday, September 23, 2011

Stocks Are Not Supposed to Fall in the 3rd Year of a Presidential Term

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While I dont take much stock in things such as Super Bowl indicators or hem line indicators in terms of giving us a tell on where the economy or market is heading, one quite prescient indicator has been a simple one - the third year of a presidential term indicator.  Generally, as a president heads to a re-election year he tries to push through some beneficial packages to help stoke the economy - which often leads to artificial bumps in GDP and profits - hence stocks follow.  But in this case, we've been on massive stimulants for years in a row.  We did get a new payroll tax reduction and extension of the Bush tax cuts in late 2010, but the market has increasingly needed ever larger steroids just to keep going sideways.  If we were in normal times, the type of package passed in early 2009 would have been something usually reserved for 2011 (although of course we normally don't see stimuli of THAT scale).  Of course, we also have the minor issue called Europe wrecking havoc to this indicator.

The WSJ's Kelly Evans reports on how rare it is for the market to suffer losses in 3rd years of the term - please note, we could have a massive rally still to come in the next 3 months to make the trend continue. ;)

  • So much for the third-year rally.  One reason Wall Street was so bullish on stocks going into 2011: This is the third year of President Barack Obama's term. Typically, "third years" are great for stocks.  Since 1962, the S&P 500-stock index has on average gained 19% in the third year of a presidency, according to Birinyi Associates. 
  • Going back further, GMO's Jeremy Grantham noted last fall that in only one of 19 such post-World War II periods have stocks ended down for the year. As he put it then, "Who wants to bet on the 20th being different this time?"  
  • Well, 2011 is different all right. The S&P 500 is down 10% year to date.
  • That isn't because the typical drivers of the third-year rally, fiscal and monetary stimulus, aren't in place. Rather, it is because they have been trumped by the severity of this economic malaise. That doesn't bode well for 2012.
  • Even if President Obama's proposed "American Jobs Act" were to pass in its entirety, it would only move fiscal policy from being a 1.25-point drag on GDP next year to being roughly neutral, according to Goldman Sachs. In reality, a watered-down version is more likely.
  • Of course, the economy could somehow strengthen on its own. But hoping for a miracle isn't much of an investment strategy.
Ms. Evans has become quite the cynic....

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