Sunday, September 07, 2008

Presidential Election Cycle Myths And Realities

I have written a number of posts highlighting the market's return in the year prior to the election and the year of the election. A couple of recent posts noted the market tends to do well in the year of the election and more so as the uncertainty of the outcome is removed.
In the Saturday edition of The Wall Street Journal, Jason Zweig wrote an interesting article, If You Bet On The Election, Don't Use Real Money, focusing on some of the myths surrounding the market and the election cycle. One example used by Zweig for why the market tends to do well in the fourth year of the presidential cycle is the fact the Fed tends to lower interest rates in year three:
"...Rate cuts are most common in the third year of presidential administration -- helping explain why stocks have a significant tendency to do roughly twice as well in Year 3 of presidential terms as in years 1, 2 or 4.

Once you account for the market impact of the Fed's actions, the apparent predictive power of the presidential cycle evaporates; if you don't know whether the Fed will have to raise or lower interest rates, it doesn't matter which party is in power."
What about the belief that gridlock is a positive for the market?:
"Some pundits base that claim on numbers dating back to 1901. Dig into the data, however, and you discover that the gains from gridlock come entirely from a single year: 1919, when Woodrow Wilson, a Democrat, had to cope with a Republican House and Senate (and his own failing health). But it's absurd to give gridlock the credit for the Dow's 30.5% rise that year. Instead, it was the end of World War I, in the final weeks of 1918, that propelled the market to one of its best years ever."
The Journal article contains other interesting reviews of myths surrounding the market and elections that make the article a worthwhile read. What tends to be the most important takeaway though is the fact the market is more a function of where we are in the economic cycle than any antidotal impacts surrounding the election.


If You Bet On The Election, Don't Use Real Money
The Wall Street Journal
By: Jason Zweig
September 6, 2008

1 comment :

Joe said...

Interesting post. I was thinking about this recently and was wondering how much of a factor the money spent by the campaigns played. If you think about the gazillions of dollars raised by candidates, and then spent on conventions, marketing, commercials, etc... that's a lot of money changing hands...