An approaching full moon framed by the weather vane atop a business' cupola on the boardwalk in Eastern Passage, Nova Scotia.(Photo: Tim Krochak, AP)
NEW YORK -- Investors already worried about the "fiscal cliff" have another reason to be uneasy as 2013 nears. The year after a presidential election tends to be a dud for stocks.
it turns out, tend to fluctuate in a predictable pattern in the
four-year span called the "Presidential Election Cycle."
the moon affects the tides, presidential elections affect the economy
and the stock market, " Jeffrey Hirsch, editor of the Stock Trader's Almanac, writes in the 2013 edition's introduction.
the first year after a presidential election is the least bullish of
the four years. The Standard & Poor's 500 index has gained just an
average 6% since 1926 during the post-election year, according to the
Leuthold Group. The best gains typically occur in the pre-election year,
when stocks climb nearly 17% on average.
general, stock returns the first two years of a president's term are
weak, followed by robust gains in years three and four. Indeed, the Dow
Jones industrial average has produced a gain of 724% in the pre-election
years and election years since 1833, the Almanac says. The post-election and midterm years saw total gains of just 273%.
behind the big discrepancy? The theory is that early in a president's
term, tough choices are made, new policies are pushed through and stocks
tend to suffer as a result of uncertainty and then the implementation
In contrast, stocks get a lift in the third and fourth
years of a president's tenure, when politicians looking to retain power
make more market-friendly moves.
Will stocks follow the historical pattern and struggle in 2013, the first year of President Obama's second term?
answer could depend on whether lawmakers can avert the economic harm
that would result from the fiscal squeeze caused by automatic tax
increases and spending cuts set to kick in Jan. 1, says Joseph Quinlan,
chief market strategist at U.S. Trust.
Stocks could get an initial
boost if a "mini" bargain is brokered in the next few weeks to avert
the so-called fiscal cliff, he says. But turbulence could follow by
midyear in 2013 if "Washington fails to craft a 'grand' fiscal plan"
that addresses the USA's economy-eroding deficits and debt and tackles
tough issues, such as the reform of entitlement programs.
Doug Ramsey, chief investment officer at Leuthold Group, expects a challenging year. His call is for a flat market next year.
reason he is paying closer attention to the historical tendency for
stocks to suffer in post-election years is the fact that the bull
market, which began in March 2009, is now 45 months old and nearing its
And the median lifespan of bull markets -- half
have lasted longer, half shorter -- over the past 50 years is just 42
months. "The bull is aging," he says. "It has moved past its median life
Ramsey also argues that much of the boosts to stocks
from the stimulus that Obama and the Federal Reserve have thrown at the
economy has subsided. An economic slowdown in China and a recession
throughout most of Europe are also acting as a drag on the U.S.
As a result, the economy will likely endure another year
of subpar growth of roughly 2%. And even with the market trading at a
below-average 13 to 14 times earnings, the valuation picture isn't
nearly as attractive as it was at the market bottom in 2009, he adds.
Stocks rose nearly 19% in the first year of Obama's initial term, but
the market was starting its rebound from its worst drop since the Great
The election-year cycle is tough to debunk, he adds.
"We tried to expose it as a fraud," he says. "But we had a hard time