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A Presidential Reason to Buy Stocks By JEFF SOMMER
Published by NY TIMES on October 9, 2010
ECONOMIC growth is precarious, unemployment is painfully high, debt levels
are staggering and the stock market isn’t all that cheap.
That’s the view of Jeremy Grantham, the chief investment strategist at GMO,
the Boston investment firm, who believes that the stock market is bound to
endure some very lean years. But in the near term, there is a good chance
that the market will rally, he said.
Why? “We are entering the sweet spot of the presidential election cycle. It
’s very hard to bet against it.”
The presidential election cycle? Well, yes. A cottage industry has sifted
the data going back more than a century and found that the stock market has
generally done much better in the second half of a president’s four-year
term than in the first. If history is a reliable guide — a big “if” —
the market outlook should be brightening.
Since 1942, for example, the 200 days after a midterm election have produced
“a remarkably consistent uptrend,” regardless of who wins, said Eric C.
Bjorgen, a senior research analyst at the Leuthold Group. In a recent report
, he found that in all 17 instances, the Standard & Poor’s 500-stock index
had gains averaging more than 18 percent.
Are these numbers just a fluke? Quite possibly. There isn’t much hard
evidence, and the history of presidential elections is too short for the
patterns to pass a rigorous statistical test. Still, some people who have
examined the cycle surmise that it reflects the simple desire of politicians
to get themselves or their parties re-elected.
“I think a president is elected and tries to get rid of the dirty stuff in
the economy as quickly as possible, so that by the time the next election
comes around, he looks like a hero,” said Yale Hirsch, the former editor of
The Stock Trader’s Almanac. He started analyzing the presidential election
cycle in the almanac’s first edition in 1968. “The stock market is
reacting to what the politicians are doing,” he said.
If the causes of the pattern aren’t clear, the numbers themselves are
startling. “There is a strong historical tendency for the market to trend
higher over the course of the third year of the presidential cycle,” said
Tim Hayes, chief investment strategist at Ned Davis Research, an investment
consulting firm.
Here are the average annualized returns for the Dow Jones industrial average
from 1900 to 2009, as calculated by Ned Davis Research for the different
years of a presidential term: 5.5 percent for Year 1; 3.7 percent for Year 2
(which would be this year); 12.6 percent for Year 3 (which would be next
year); and 7.5 percent for Year 4.
The pattern is strong enough to count as “remarkable,” Mr. Hayes said, a
word echoed by many strategists
“The pattern is quite remarkable,” said Liz Ann Sonders, chief investment
strategist at Charles Schwab.
“These numbers are remarkable,” Mr. Grantham said.
“I love those numbers,” said Linda A. Duessel, equity market strategist at
Federated Investors, who said that knowledge of the cycle had bolstered her
cautiously bullish views of the market.
A husband-and-wife team, James R. Booth, now a professor of finance at
DePaul University, and Lena Chua Booth, a professor at the Thunderbird
School of Global Management, were unable to explain the pattern in a 2003
paper in The Review of Financial Economics. They tried to map the cyclical
stock market returns to a deeper “political business cycle,” but didn’t
find significant correlations to factors like inflation or interest rates.
“We were unable to come up with an explanation,” Mr. Booth said.
Kevin Grier, an economics professor at the University of Oklahoma, hasn’t
studied the market cycle, but in a 2008 paper in Public Choice, he found
evidence of a political business cycle corresponding closely to the election
calendar. From 1961 to 2004, the money supply tended to start rising in the
second year of a presidential term, followed by a rise in G.D.P., he
concluded.
In a telephone interview, he said that he was only conjecturing, but that he
believed that political influence on the Federal Reserve was responsible
for the rise. “I think the idea that the Fed is divorced from politics and
from real world affairs and conducts matters from an ivory tower setting is
more of a myth than a reality,” he said. But with one exception, he said,
“there is no smoking gun.”
That exception was in the Nixon administration. In 2006, with the aid of the
Nixon White House tapes, Burton A. Abrams, an economics professor at the
University of Delaware, found that in 1971 and early in the 1972 election
year, Nixon pressured Arthur F. Burns, then the Fed chairman, to expand the
money supply with the aim of reducing unemployment, expanding G.D.P. and
ensuring Nixon’s re-election. Nixon also imposed wage and price controls to
constrain inflation. He won in a landslide — only to resign in disgrace in
the wake of the Watergate scandal.
BUT Nixon’s excesses m
Published by NY TIMES on October 9, 2010
ECONOMIC growth is precarious, unemployment is painfully high, debt levels
are staggering and the stock market isn’t all that cheap.
That’s the view of Jeremy Grantham, the chief investment strategist at GMO,
the Boston investment firm, who believes that the stock market is bound to
endure some very lean years. But in the near term, there is a good chance
that the market will rally, he said.
Why? “We are entering the sweet spot of the presidential election cycle. It
’s very hard to bet against it.”
The presidential election cycle? Well, yes. A cottage industry has sifted
the data going back more than a century and found that the stock market has
generally done much better in the second half of a president’s four-year
term than in the first. If history is a reliable guide — a big “if” —
the market outlook should be brightening.
Since 1942, for example, the 200 days after a midterm election have produced
“a remarkably consistent uptrend,” regardless of who wins, said Eric C.
Bjorgen, a senior research analyst at the Leuthold Group. In a recent report
, he found that in all 17 instances, the Standard & Poor’s 500-stock index
had gains averaging more than 18 percent.
Are these numbers just a fluke? Quite possibly. There isn’t much hard
evidence, and the history of presidential elections is too short for the
patterns to pass a rigorous statistical test. Still, some people who have
examined the cycle surmise that it reflects the simple desire of politicians
to get themselves or their parties re-elected.
“I think a president is elected and tries to get rid of the dirty stuff in
the economy as quickly as possible, so that by the time the next election
comes around, he looks like a hero,” said Yale Hirsch, the former editor of
The Stock Trader’s Almanac. He started analyzing the presidential election
cycle in the almanac’s first edition in 1968. “The stock market is
reacting to what the politicians are doing,” he said.
If the causes of the pattern aren’t clear, the numbers themselves are
startling. “There is a strong historical tendency for the market to trend
higher over the course of the third year of the presidential cycle,” said
Tim Hayes, chief investment strategist at Ned Davis Research, an investment
consulting firm.
Here are the average annualized returns for the Dow Jones industrial average
from 1900 to 2009, as calculated by Ned Davis Research for the different
years of a presidential term: 5.5 percent for Year 1; 3.7 percent for Year 2
(which would be this year); 12.6 percent for Year 3 (which would be next
year); and 7.5 percent for Year 4.
The pattern is strong enough to count as “remarkable,” Mr. Hayes said, a
word echoed by many strategists
“The pattern is quite remarkable,” said Liz Ann Sonders, chief investment
strategist at Charles Schwab.
“These numbers are remarkable,” Mr. Grantham said.
“I love those numbers,” said Linda A. Duessel, equity market strategist at
Federated Investors, who said that knowledge of the cycle had bolstered her
cautiously bullish views of the market.
A husband-and-wife team, James R. Booth, now a professor of finance at
DePaul University, and Lena Chua Booth, a professor at the Thunderbird
School of Global Management, were unable to explain the pattern in a 2003
paper in The Review of Financial Economics. They tried to map the cyclical
stock market returns to a deeper “political business cycle,” but didn’t
find significant correlations to factors like inflation or interest rates.
“We were unable to come up with an explanation,” Mr. Booth said.
Kevin Grier, an economics professor at the University of Oklahoma, hasn’t
studied the market cycle, but in a 2008 paper in Public Choice, he found
evidence of a political business cycle corresponding closely to the election
calendar. From 1961 to 2004, the money supply tended to start rising in the
second year of a presidential term, followed by a rise in G.D.P., he
concluded.
In a telephone interview, he said that he was only conjecturing, but that he
believed that political influence on the Federal Reserve was responsible
for the rise. “I think the idea that the Fed is divorced from politics and
from real world affairs and conducts matters from an ivory tower setting is
more of a myth than a reality,” he said. But with one exception, he said,
“there is no smoking gun.”
That exception was in the Nixon administration. In 2006, with the aid of the
Nixon White House tapes, Burton A. Abrams, an economics professor at the
University of Delaware, found that in 1971 and early in the 1972 election
year, Nixon pressured Arthur F. Burns, then the Fed chairman, to expand the
money supply with the aim of reducing unemployment, expanding G.D.P. and
ensuring Nixon’s re-election. Nixon also imposed wage and price controls to
constrain inflation. He won in a landslide — only to resign in disgrace in
the wake of the Watergate scandal.
BUT Nixon’s excesses m
