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Kent Thune

Presidential Cycle Indicator for 2013

By December 6, 2012

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As we approach a new year and the beginning of a new term for Obama, how do you think the Presidential Election Cycle will factor into market returns in 2013?  Is this stock market indicator something investors should observe and take seriously?

The Presidential Election Cycle Indicator for stocks says:

  • In years one and two of a presidential term, the President exits campaign mode and works hard to fulfill campaign promises before the next election begins. For this reason, the first year is typically the weakest of presidential term and the second year is not much stronger than the first.
  • In years three and four of the Presidential term, the President re-enters campaign mode and works hard to strengthen the economy. For this reason, the third year is typically the strongest of the four and the fourth year is the second strongest of the four.

But will this hold true for the markets in Obama's first year of his second term?  I wouldn't bet (or invest) on it.  First the indicator only appeared to work in the middle of the 20th century, especially in the FDR, Truman and Eisenhower presidencies.  George H. W. Bush's first year was his best, both of Clinton's first years were strong and Obama's first and second years were by far his best while the year that the Presidential Cycle would predict as best for stocks--the third year--was the worst for Obama.

Furthermore, 2013 will mark the first year of Obama's second term, which is more like a 5th year, rather than a first and the Presidential Election Cycle indicator gets a little foggy on that forecast!

Mark Hulbert at MarketWatch had some good points to add the first year of a presidential cycle:

...the widely held belief that the market performs poorly in the first year of a president's term, there is precious little evidence for such a notion.

...the only statistically significant pattern in the presidential election year cycle is the third year, which is well above average.

...Though first years of a president's term, on balance, aren't particularly poor ones for the stock market, they do appear to be especially volatile.

As usual, patterns are good as long as they are working and there is often no distinguishing between causation and correlation.  In other words, don't rely on them.  If you like to look at economic indicators and make subtle but strategic moves based upon realistic expectations of near-term economic and market conditions, you may consider employing some form of tactical asset allocation.

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