July 4, 2020

Off the Charts: As a Market Predictor, a Trusty Guide Falters

Through November, an investor in the stocks in the Standard Poor’s 500 had a small profit of 1.1 percent this year, including reinvested dividends. But that figure was a 6 percent loss a week earlier, before investors took pleasure from positive reports of post-Thanksgiving retail sales and became more optimistic that another round of European summit meetings next week would reduce the threat of a new financial collapse.

The last negative return during the third year of a presidential term was in 1939, when the loss was a barely noticeable 0.1 percent. That loss came as storm clouds gathered in Europe with the beginning of World War II. It is hard to think of any year since the war when Europe’s problems have loomed as large to investors as they have this year.

As can be seen from the accompanying charts, an investor who put money into American stocks at the beginning of each third year, and then got out of the market for the next three years, would have done far better than one who chose any other year of the presidential cycle to invest in.

With this year’s performance, the compound annual gain for all third years since World War II will dip below 20 percent, barring a major rally this month. During the postwar years, the second-best showing was from fourth years — the years when a new president is elected. It was just over 8 percent.

A $100 investment in 1947, allowed to grow only in third years, would be worth more than $2,000 now. Similar investments in the first, second or fourth years would have grown to less than $400.

It has long been suspected that the fact that third years were the best was far from a coincidence, as presidents sought to stimulate the economy and corporate profits heading into a year when they would seek re-election or, if they were completing a second term, try to keep the White House in the hands of the same party.

This year, the economic outlook has been anything but clear, with encouraging signs of growth early in the year replaced by fears of a double-dip recession in the summer as the European credit crisis intensified. Since August, the market has gyrated wildly as European prospects have seemed to change almost daily.

At the same time, it has become increasingly clear that Congressional Republicans are unlikely to allow any significant effort to stimulate the economy before next year’s election.

President Obama may be pleased to learn that third-year stock market returns have not been good predictors of election results. The four best third years — all with total gains of more than 30 percent — were in 1955, 1975, 1991 and 1995. In 1956 and 1996, incumbents easily won re-election. In 1976 and 1992, incumbents were defeated. Similarly, the results after the four lowest postwar gains were also split, with the incumbent party winning twice and losing twice.

The stock market has long been viewed as a leading indicator of the economy, and the presidential cycle seems to bear that out. The best economic growth, on average, has been in the fourth years of presidential cycles, with the third year second-best.

There is another historical indicator that provides hope that the third-year pattern will hold. Year-end rallies are common, and as a result December has been more likely to show increases than any other month over the last six decades.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=034cb25a3e6f4fa25922c3e892eaa6f2