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Obama re-election good news for investors

I suspect it will hardly come as a surprise to learn that a number of American equity analysts have examined, reviewed, and then scrutinised relative stock market performances under different presidents.

For the record, only three presidents elected since 1925 have overseen unbroken growth in the S&P 500 index of America’s largest corporations during their presidential term (Harry Truman, 1948-52; Ronald Reagan, 1985-88 and Bill Clinton, 1993-96).

The result of all this analysis is an investment phenomenon known as the Presidential Term Cycle.

Essentially, this cycle, broken down into the four years of each president’s term of office, indicates (I nearly said ‘proves’, but the sample is far too small to prove anything – there have not been too many US presidents) that generally speaking, the final two years of a presidential term are the most positive in terms of S&P 500 performance. On average, since 1927, the index has risen by almost 20% during the third year of the presidential term.

As we saw during the recent US election campaign, which eventually petered out to an anti-climactic conclusion earlier this week, the breadth of analytical data being collected from voters and subsequently collated by political teams of every persuasion was quite staggering. Voters are categorised according to an incredible variety of individual features and then herded into hybrid peer groups and allocated peculiar collective names such as RVAs (Romney Voting Aliens).

While few of us have much time for obtuse political mumbo-jumbo, it’s odd that few investors take note of the trends inherent within the Presidential Term Cycle and the factors that determine them.

Upon closer examination, it makes enormous sense for market risk to be concentrated within the first two years of a president’s term. Markets, as most investors appreciate, hate uncertainty with a vengeance and so when a new president – or even one that has been re-elected – arrives at the White House replete with a new batch of ideas and projects, markets tend to react negatively.

The threat of change often results in a greater, more palpable sense of risk aversion during the first half of presidential terms which, in turn, tends to cultivate bear markets. Logically, this makes sense for the first two years of any president’s term in office invariably coincide with a busy legislative calendar and, therefore, a disproportionate amount of bear markets.

By contrast, presidents tend to avoid introducing potentially controversial legislation in the second half of their terms because they’re either trying to get re-elected, or simply because they’re worn out and tired. This is particularly true in a president’s seventh and eighth years.

On Tuesday, President Obama became only the thirteenth incumbent president to be re-elected, so is there any market data likely to be of interest to investors considering buying US equities? Perhaps.

Since 1900, there has only been one occasion (1972-73) when the S&P 500 index fell in the first and second year of a re-elected president’s second term of office. Given how peculiar that time was for America, perhaps that was to be expected. However, if the index does not fall, it tends instead to increase significantly.

Positive years, ie 12-moonth periods during which the S&P has risen, in the first half of a re-elected president’s term of office have averaged 21% and 23% respectively.

President Obama will outline his own fresh legislative agenda in January, although his hands are likely to be tied as the Republicans continue to control Congress. For investors, this could be excellent news as it would suggest there’ll be few shocks for the stock market to absorb, which in turn might provide a timely boost to the S&P 500 index during 2013.  

 

posted on 08 November 2012 19:20 byPJS

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