The article below compares the average behavior of the stock market over the typcial presidential term to the current cycle. Generally, this Y4 is unusually weak, we should be seeing moderate gains. Courtesy of Steve LeCompte of the CXO Advisory Group LLC.
Visualization of the Stock Market Across the Typical Presidential Term
Taking the same approach as used for the calendar year at Trading Calendar, what is the typical cumulative return profile for the U.S. stock market over the four-year presidential term? Using monthly closing levels of the S&P 500 index from December 1951 through July 2008 (13+ presidential terms), we find that:
The following chart plots the average cumulative return of the S&P 500 index across the four years of the presidential term (Y1-Y4) for the entire sample period based on monthly data (M12=December). The return profile indicates that all of Y1 and most of Y2 are approximately flat. Strong gains follow from late in Y2 to two-thirds through Y3. Moderate gains ensue through the end of the term.
For comparison, the chart includes a plot of the cumulative return of the S&P 500 index for the 2005-2008 presidential term through July 2008. This current term is roughly typical until Y4.
Is the average behavior persistent over time?
One way to test persistence of a pattern is to break the sample into subsamples to see whether the subsamples are consistent. The next chart shows the average cumulative return of the S&P 500 index across the four years of the presidential term for two subsamples of approximately equal duration (about seven terms each), 1953-1980 and 1981-2008, again based on monthly data. The shapes of the two profiles appear similar enough to warrant a cautious belief in some persistence.
In summary, there is some evidence to support a belief in three phases of the U.S. stock market across the typical presidential term: (1) flat at the beginning; (2) strongly advancing in middle; and, (3) moderately advancing at the end. However, the data span a small sample of presidential terms, so confidence in this view is low.
For related research, see Blog Synthesis: Politics and the Stock Market and Blog Synthesis: Calendar Effects. See especially our blog entries of 1/4/08 and 6/16/08 for other aspects of the relationship between the presidential election cycle and stock market behavior.
