The Stock Market’s Presidential Cycle: 2011 Should be a Winner

There’s a saying in the stock market that “the trend is your friend,” meaning it’s usually a better idea to invest along with trends than fight strong headwinds. Any runner, walker, biker or sailor knows this is true; you can usually get a lot further with less effort if you let the tailwinds help propel you along.

The Presidential Cycle Trend has an amazing track record, so it’s worth examining.

The Stock Market’s Presidential Cycle Trend

The U.S. stock market–and economy–tend to perform much better in the last two years of a president’s term than they do in the first two years.

The stock market’s sweet spot is usually the third year of a presidential term, while the economy usually shows the most growth in the fourth year. The difference of one year is because the stock market is considered a leading economic indicator, predicting the near-term future of the economy.

The Reason for the Presidential Cycle Trend

The predominant theory for this trend is that presidents approaching reelection enact policies to stimulate economic growth. They do so because presidents are more apt to be reelected if the economy is strong at election time.

Likewise, presidents nearing the end of their second terms also enact stimulative economic measures in hopes of keeping the White House in their party’s control. Tough economic measures are put on hold until after elections.

Of course, neither a president nor the government can control all factors affecting the economy. However, presidents can control some factors–and it’s these factors that likely result in the Presidential Cycle Trend.

The U.S. Stock Market: A Current Snapshot

Through November 3, the S&P 500’s 2011 year-to-date total return (includes dividends) is 1.97%, while it’s price return (excludes dividends) is 0.28%.

The U.S. stock market had been in negative territory for 2011 until the large gains in October.

The American Economy: A Current Snapshot

On November 2, the Federal Reserve significantly reduced its previous forecast for economic growth, as well as increased its forecast for unemployment, through 2013.

The Fed now predicts the American economy will grow at a scant 1.6% to 1.7% for 2011. For 2012, it projects growth will range between 2.5% and 2.9%.

The Current Presidential Cycle

We’re in year #3 of the Obama administration. If the presidential cycle trend holds true, the U.S. stock market will have a winning year. With less than two months left in 2011 and the S&P 500’s year-to-date (Nov. 3) total return at 1.97%, the market’s going to have to hustle to book a truly winning year. It will need to tread water simply to finish in positive territory.

November and December are historically good months for the stock market, so a strong finish to 2011 is very possible. However, if the stock market has a poor finish in 2011, it doesn’t bode well for the American economy in 2012.

The trend might be your friend, but, at best, it seems like a fair weather friend in 2011.

Presidential Cycle Stock Market Performance by Year

Here’s a look at the median returns for each of the four years in presidential terms since 1946, or the end of WWII.

presidential cycle stock market

presidential cycle stock market

The third year surely has been a charm. Look at the third year on the first chart: An 18% median return!

Like any trend, it’s not perfect. It didn’t hold true in the most recent full presidential cycle, George W. Bush’s second term. The stock market barely eked out a small gain in 2007, the third year of Bush’s term. Then the American economy tanked in 2008, the last year of Bush’s term, as the country entered The Great Recession.

Presidential Cycle Trend Predicts Economic Growth in 2012

Though it’s not looking likely, let’s hope for strong economic growth in 2012. The American economy needs a good year, as do all of the world’s economies.