A little stock market commentary

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2 responses to “A little stock market commentary”

1. 

   Karen M

   October 5, 2006

   So why does the stock market go up in the third year of the presidential election cycle?

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2. 

   tom Faranda

   October 7, 2006

   Karen
   Of course that’s a great question. There’s no debating the figures but some experts on these things think that it’s pure chance.
   For example Mark Hulbert, who is certainly well respected, recently said: “No plausible explantion yet for statistical correlations.” Read his full column here: http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B747B27D7-3BBF-4893-8FD3-CF3E09D225D2%7D&siteId=mktw
   I happen to not agree with Hulbert. In the whole history of the S & P 500 there’s been only two negative third years of any President’s term – 1931 and 1939. All other third years were double digit positive, except 1947 and 1987, which were single digit positve.
   I think there are two reasons: Firstly administrations try to get the tough legislation passed in the first two years of their term, because they know that typically the party in power loses seats in the mid-term elections (That was not the case in 2002 when the Republicans actually gained seats, but looks likely to hold true this time around). So whoever’s President knows that whatever is his toughest legislation to pass, he’d better go for it in the first two years. For example Bush tried (and failed, unfortunately) to get social security reform last year. Highly unlikely he’ll be offering any serious reforms (social security or medicare) in the next two years.
   Secondly, the federal reserve tends to have an accomodative monetary policy in the last two years of any President’s term. For example they tend to keep interst rates low, to keep the economy moving along, even if it raises the risk of increasint inflation in the future (afeter the election!). Greenspan, the former head of the Fed, did it for all the incumbent presidents, whether they were republican or democrat (Greenspan is a democrat). Can you imagine the new Fed chariman Bernanke (A republican appointed by Bush) not maintaining an accomodative monetary policy?
   So the economy should be doing OK, or at least appear to be doing OK, and most people voter their pocketbook. AND the markets, and most people are afraid of change, which is why major legislation, even needed legislation, is probably off the table in the next two years.
   The financial markets like the status quo; gridlock in Washington doesn’t bother them. “Better the devil you know, then the devil you don’t know.”
   I think these are very plausible reasons for why the market tends to go up in the second half of any President’s term. By the way, there have only been three negative fourth years in any presidential term (one of them was 2000).
   Of course none of this guarantees a good 2007 or 2008 for the financial markets. nothing is a sure thing!

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