A Sure Bet
It's a presidential election year. That's good news for your investment portfolio
When Al Gore was running for vice president in 1992, he repeatedly delivered a caustic critique of the first Bush administration's economic policies, pithily concluding: "Everything that should be down is up. Everything that should be up is down."
Well, as far as Wall Street is concerned, just the opposite exists as this election year begins. Economic growth is up; unemployment is down, to 5.7 percent in December though job growth is surprisingly anemic. Corporate profits are up, inflation is down. And most important, the stock market is up--way up. The Dow Jones industrial average soared 25 percent in 2003, the Standard & Poor's 500 index 26 percent, and the Nasdaq 50 percent. Of course, not all the economic and financial statistics are at their strongest levels ever--or even where they were when George W. Bush took office three years ago.
But in trying to figure out what 2004 holds in store for investors, you really don't need to understand the complex dynamics between taxes and interest rates, and inflation and earnings, and a host of other financial variables. Just look instead at the calendar and note that 2004 is a presidential election year. It just so happens that stocks do pretty darn well in years of presidential primaries and debates. Heck, investors who noticed that 2003 was a pre-election year shouldn't have been surprised to see stocks soar. Since World War II, the stock market has never had a negative pre-election year. And it has suffered only three down years in an actual election year. "The election cycle is one of the few Wall Street truisms that are actually true," says market historian James Stack of the InvesTech Research newsletter in Whitefish, Mont., "since it is actually derived from a logical sequence of events."
The presidential election cycle indicator isn't one of those coincidental market barometers like the one that purports to predict how stocks will fare in the coming year by looking at the winner of that year's Super Bowl. A victory by the National Football Conference champion supposedly presages a bullish year for stocks, while an American Football Conference victory presages a decline. As measured by the Dow, this uncanny indicator has been correct 30 out of the past 37 years for an 81 percent success rate. Last year, the NFC's Tampa Bay Buccaneers beat the AFC's Oakland Raiders and voila!, the market finishes in the black. Of course, what happens on the field has no discernible effect on earnings, interest rates, inflation, or much other than the personal income of fans in office betting pools.
Not so with the election cycle indicator. "There is definitely something there," says investment strategist William Rhodes. "The theory is that to get re-elected, presidents will boost spending or cut taxes in the third year of their term to give the economy a lift. It makes a lot of sense." Which is exactly the script followed by the current resident of 1600 Pennsylvania Avenue.
The stronger economy usually leads to higher stock prices. Since World War II, the stock market has posted an average annual return of 9.5 percent in the first year of presidential terms, 8.1 percent in the second year, 21.3 percent in the third year, and 12.2 percent in the fourth, or election year. Similarly, nine out of 13 recessions since 1929 have begun in the first year of a presidential term, seeming to support the theory that presidents try to get bad news behind them as quickly and as early as possible in their term. This time around, the recession officially began in March 2001, two months after Bush took office, although he has claimed to have inherited it. Last May, Congress passed a $350 billion tax cut to boost the economy. In addition, spending continues to rise, creating an estimated $480 billion budget deficit this year.
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