Presidential Cycle and Bull Market Entering Year Three

In a few short weeks the presidential cycle will enter its third year and the market has been kind to investors at this point in the presidential cycle. As the below chart details, since 1945, the third year of a president's term has seen the S&P 500 Index rise an average of 17.1% and up years have occurred in 94% of those years.

From The Blog of HORAN Capital Advisors

Source: Standard & Poor's Outlook

S&P notes in the 2011 Outlook Forecast newsletter,

A rational for third-year outperformance, in our opinion, is stimulus anticipation. To stay in power, the president typically uses policies designed to stimulate the economy before voters go back to the polls in November of year four. Investors anticipate the benefit of this stimulus to economic growth, corporate earnings, and consumer confidence, and bid stocks higher in year three.

In addition to the third year of the presidential cycle, in March, the stock market would be entering the third year of a bull market. With this, the economy does seem to be gaining some strength with the Fed's second round of quatitative easing in place. Additionally, the tax package that was recently appoved by Congress will provide consumers with additional money to spend with the payroll tax being reduced by 2%.

From an investment perspective, trading activity does seem to indicate sector rotation is taking place. The below table outlines the performance of each sector in the S&P 500 along with the frequency of each sector's outperformance. The best performing sector has been energy followed by utilities.

From The Blog of HORAN Capital Advisors

Overall market action does seem to be on the side of higher prices. From a contrarian perspective though, most investment strategists are forecasting higher stock prices for 2011. When everyone is in agreement on the same trend, this does raise a yellow flag. At HORAN we continue to like the valuations of higher quality large capitalization stocks. We also believe emerging markets, and those companies selling into the emerging markets, will provide better returns in 2011.

Source:

2011 Annual Forecast
The Outlook
Standard & Poor's
December 22, 2010
http://www.outlook.standardandpoors.com/NASApp/NetAdvantage/servlet/login?url=/NASApp/NetAdvantage/index.do