April 2008

You might have noticed that they're having an election this year. And even if you've tuned out all the political hot air, you can bet Wall Street is listening — carefully.

What happens at the ballot box, of course, could have a major impact on the economy down the road. More immediately, just the fact that this is a presidential election year might be affecting how stocks perform now.

Stocks often do well during the third and fourth years of a presidential term, says Jeffrey A. Hirsch, co-author of The Stock Trader's Almanac. Conversely, the first half of the cycle is usually the weakest.

According to Hirsch's research, stocks gained a total of 749% during the last two years of the 44 administrations since 1833. That's compared to 243% over the first two years of those terms. The bulk of the gains actually came in the third year, when stocks finished in positive territory about three-quarters of the time.

Notably, stocks usually struggle early in years when the incumbent party is eventually turned out of the White House. Since 1944, the S&P gained an average of 35% from January through May when the incumbent party won and only 9% when it lost.

A check in every pocket
Cynics argue that politicos rig the economy to spurt around the time voters go to the polls. Federal spending between 1962 and 1973 was 29% higher in presidential election years. Tax cuts also have been a popular way to put ready cash in the pockets of a disgruntled electorate.

Sometimes presidents resort to more extreme and unusual measures.

Richard Nixon imposed wage and price controls about 15 months before the 1972 election and Jimmy Carter tried credit controls in 1980. Both were unsuccessful in containing inflation and probably contributed to the major bear markets that began shortly thereafter.

Prime time
But politics is not the only factor driving stock prices. So far this year, Hirsch says, economic and technical concerns have trumped the presidential election cycle.

But there is strong precedent for a turnaround.

The last seven months of a presidential election year have been a particularly profitable time to be invested in stocks, with the S&P gaining ground over that period in 13 of the last 14 cycles since 1950. The lone exception was in 2000, when the result of the Gore-Bush contest was in limbo while the Supreme Court considered a recount of the Florida tally.

And if the economy needs a boost, what better time than during a presidential election year?

As Yale Hirsch, the original publisher of The Stock Trader's Almanac has noted, "money faucets get turned on" when the political stakes are high.