"Presidential Cycle" Suggests the S&P 500 Will Soar Before the End of 2011 – Here's Why

So says David Kass (blogs.rhsmith.umd.edu)  in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Kass goes on to say, in part:

A table on page 2 of the 2010 Berkshire Hathaway Annual Report displays a series of annual returns to the S&P 500 (including dividends) [which shows that]:

•  over the 46 year period from 1965 – 2010 the compounded annual return to the S&P 500 has equaled 9.4%.
• In the 8 instances over this time period, in the third year of a president’s first term, the average annual total return to the S&P 500 has equaled 27.5%, with a range from 18.2% in 1979 to 37.6% in 1995.
• In the three cases of a Democrat in the White House (Johnson 1967, Carter 1979, and Clinton 1995) the average gain for the third year of their presidency was 28.9%.
• With Republicans in the White House (Nixon 1971, Ford 1975, Reagan 1983, George H.W. Bush 1991, and George W. Bush 2003) the average gain was 26.7%.

Is this observation just a statistical oddity, or is there a good explanation? One possible explanation of the “third year effect of a presidential cycle” is the desire of the incumbent to be re-elected. Since the state of the economy on election day is a major determinant of whether an incumbent president keeps his job, a stimulative fiscal policy (and frequently an accompanying stimulative monetary policy) can be expected. This is the currently the case. Since the stock market forecasts future economic conditions, it would not be too surprising to see it rise in the year before the President seeks re-election…

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Conclusion

[The S&P 500 closed at the end of 2010 at 1,257.64 and a 28.9% increase in 2011 would equate to 1,621.10. The S&P 500 closed at 1215.39 on October 20th. As such,] if the above trend is to continue in 2011, which is the third year in President Obama’s first term, then the stock market [would be expected to increase by 33.4%] over the remaining 75 days of 2011 [to reach 1,612.10!]

*http://blogs.rhsmith.umd.edu/davidkass/