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Third Quarter Investment Outlook

A Look Back, As We Look Forward

By: Lynn Hamilton
Friday, October 14, 2016

As one can see from the included chart, the stock market tends to do best the year before a Presidential election.   Reason: a first-term president would like to be re-elected, and a two-term president would prefer their party wins the election, as sort of a “confirmation.”   It is very rare for any president to win more than 60% of the popular vote.  The “swing voter” mostly tends to “vote the economy,” so the incumbent president wants the economy to be performing well that year.  There also might be a desire to “get the painful stuff done” during the first year of the term.  Since the stock market leads the economy by about a year, it makes sense that the third year of a president’s term has the best stock market returns.

 

The first year of a president’s term can be full of surprises.  Of the 21 such years going back to 1933, 15 had double-digit gains or losses:  13 of the years were gains (11 double digits) and 8 were losses (4 double digits).  A very special shock came in 1929. Newly-elected president, Herbert Hoover had been Commerce Secretary throughout of the administrations of Harding and Coolidge.  He had international experience both in business the administrations of Wilson.   Hoover was an international engineer. It appeared that Congress would pass the Hawley-Smoot Tariff.  This was both the largest peace-time tax rise in American history and a huge protective tariff.  It was expected that Hoover would veto the bill.  In the fall of 1929, he said that if Hawley-Smoot passed, he would sign the tariff.  The next week the stock market began the “crash of 1929.”  This might be as significant as World War II since all Democrat and Republican candidates have advocated more open trade.  This year both candidates are protectionists.

 

Let’s examine 9 of those 21 post-election years with truly “special” surprise events.  In 1933, the market returned +73%.  Of course, this was off a bottom of 89%.  The new administration provided an expansionary fiscal policy, while the Federal Reserve ended the tight-money policy that had greatly contributed to the Depression.  In 1937, those policies ended with tighter money supply and tax increases.   The result was “the recession within a depression.”  Market return was negative 26%. Pearl Harbor was truly a surprise that made 1941 interesting.   Prior to December 7, the market was down 9%.   From December 7 to year end, the market rose 4.8%!   The year 1945 saw the market return +34.4%.  Few would have guessed that World War II would be won by September of that year. 

 

 The beginning of the worst “bear” market since the Depression was seen in 1973, where the Bretton Woods agreement stated currencies were likened to the price of gold and the U.S. dollar was seen as reserve currency. That year the market return was 13%.  Also in 1973, the oil embargo forced oil prices up radically.  The beginning of economic “malaise” was seen in 1977, with a loss of 15.2%. With “9/11” 2001 was certainly a major surprise, BUT the market only declined by 5.4%. Another major post-election surprise year was 2009, which we all associate with a grim recession.  That year the market ROSE a mouthwatering 28.4%.  The market bottomed in early March, and the stock market had begun its comeback.

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