Historically, election years have been positive for the US stock market due to the Presidential Cycle. This year may be no different. Investors are looking to this election cycle and its correlation with the stock market, hoping that the cycle will once again give investors something to cheer about.
The Presidential Cycle Defined
The Presidential Cycle has historically provided a positive return for the stock markets. In the past, the markets have risen as elections approach and the current administration tries to stimulate the economy. The goal is to have voters go to the voting booths with jobs and feeling good about the economy. These increases the odds that the party in power will stay in power.
Historically, years 3 and 4 in the presidential cycle are strong market years. However, even though the stock market ended with a gain, last year the theory didn’t fall into place with a large gain, despite the fact that since 1945, 94 percent of year 3 cycles have been positive.
All Eyes Are On The Economy
Regardless of who wins the election this year, the economy will be the main focus of the campaigns. This is good news for the markets, as investors tend to get more positive as new ideas are presented on how to fix the system.
In fact, recent polls have shown how much more concerned voters are with the economy than in the 2007 elections:
To give you an idea of how much the economy matters in this election, Intrade.com’s data (which allows one to “bet” on the outcome of the election) shows how closely the performance of the stock market and the odds of President Obama’s reelection are correlated:
How Accurate Is It?
So, how accurate is this indicator? Since 1948, the S&P 500 have been positive over 80% of the time during an election year. This makes the Presidential Cycle an indicator that many investors pay attention to.
What Does All This Mean For The Rest Of 2012?
Despite all the negative economic news here in the US and Europe’s banking problems relating to Greece (and others), the US stock market has been trading in a surprisingly predictable pattern. Election year data on the S&P 500 index going back to 1928 shows a very strong similarity to this year’s stock market pattern:
Video – The Potomac River, George Washington, and The Presidential Cycle
Some additional thoughts on the Presidential Cycle and how it will impact the stock market for the rest of 2012.
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Image source: Flickr via League of Women Voters of California