"Presidential Cycle" helps investors

Pocketbook issues always have played a key role in deciding presidential elections, and, mindful of that reality, candidates for the nation's highest office spend enormous amounts of time, energy, and money during the campaign season trying to convince voters that they, as opposed to their rivals, possess the best ideas for creating economic prosperity. A study by H.S. Dent Publishing, Dallas, Tex., suggests, however, that wealth generation for equity investors may have less to do with which candidate is elected and much more to de with when investors move into and out of the equity markets during the succeeding "Presidential Cycle"--the four years that follow the election year.

The study reviewed the performance of the S&P 500 against the returns of a model equity portfolio from 1952 through 2003. The study's findings reveal a pattern of predictable performance during each year of each Presidential Cycle. As significant, the study confirms that investors may be able to position themselves to generate higher returns by relying upon the Presidential Cycle to move into and out of equity markets.

"Our findings confirm that Year 1, which represents the first year of a president's term in office, and Year 3 are periods of growth in the equity markets," says Rodney Johnson, president of H.S. Dent Publishing. "Year 4 is basically flat with a slight upward trend and Year 2 is traditionally a down year. Year 2 is a good time to move out of equities and await the buying opportunity leading back into Year 3."

According to Johnson, each year of the Presidential Cycle appears to possess distinguishing characteristics that could explain the differences in market performance.

In Year 1, Americans are in a honeymoon phase with the new president, waiting for campaign promises to be fulfilled, which results in investor optimism.

Year 2 is characterized by a general decline in optimism by investors as the president and Congress begin trying to manage difficult budget-related issues and generally go about the mundane task of running the government.

In Year 3, the president begins to lay the groundwork for his reelection bid, or at least the election of another member of his political party. This usually translates into promises of more feel-good programs targeted at the masses, which have the effect of energizing investors.

Year 4 is the actual election year, so investors remain steady as they try to determine which party will prove a better steward of the nation's economy during the next four years.

COPYRIGHT 2004 Society for the Advancement of Education
COPYRIGHT 2004 Gale Group