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Mark Hulbert
Aug. 6, 2010, 12:01 a.m. EDT · Recommend (1) · Post:
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By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- To the extent any of us are thinking about national politics these days, most are focusing on the midterm elections that are scheduled for this coming November.
But the stock market, which typically discounts events further into the future than those just a couple of months away, is already beginning to anticipate what will happen during President Obama's third year in office.
And, because third years are, on average, the most bullish of the four years of a president's term, this might help to explain why the stock market has had a positive bias in recent weeks. Thursday was no exception, with the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,533, -142.06, -1.33%) battling back from being off nearly 70 points at the open in the wake of unexpectedly bad jobs news, in the end closing down just 5 points.
But before we throw caution to the wind, it's important to take a closer look at the historical record and, in particular, at how third years perform when they come on the heels of the kind of explosive rally we saw beginning in March 2009.
To find out, I fed into my PC the yearly returns for the Dow back to 1896, when this benchmark was created. Following the lead of some prominent adherents of the Presidential Election Year Cycle, I defined the years to begin at the end of the third quarter. Notice that, using that definition, the third year of President Obama's term will begin in less than two months' time.
As has been widely reported by researchers before, I found a stark difference in the average returns for each of the four years. The difference between year No. 3 and the other years' averages is significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine.
I next ran a statistical test to see if the magnitude of the market's year-three return was in any way correlated with how it had performed in the prior period. I came up empty, which is good news since it means that the magnitude of the rally over the last 16 months does not -- in and of itself -- doom the stock market next year.
I also tested to see if valuations had anything to do with the magnitude of the market's returns in the third years of presidential terms, since the stock market today is no where near as cheap as it was in March 2009, when the explosive rally began.
Once again I came up empty: On average, third years perform just as well when price/earnings ratios are high as they do when those ratios are low.
The statistical case in favor of the market going up in the third year of a president's term is so strong, in fact, that even otherwise bearish advisers are making an exception for next year. One such adviser is Jeremy Grantham, the famed chief investment strategist at GMO, the Boston-based money management firm.
Earlier this year, after reviewing for clients why he was long-term bearish on the U.S. stock market, Grantham added: "Do not think for a second that a very stimulated market will go down in Year 3 just because it's overpriced ... even badly overpriced. So far it has had 19 tries to go down since 1932 and has never pulled it off."
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
Our American-owned insurance company, the aptly named American International Group Inc., is caught between the pressure to unwind its relationship with the government and the lack of investor interest in its various businesses.
12:19 p.m. Today12:19 p.m. Aug. 6, 2010 | Comments: 10
- James5555 | 11:17 p.m. Aug. 5, 2010
"Mark Hulbert: Looking to year 3 of presidential cycle http://on.mktw.net/cDLXR8" 11:44 p.m. EDT, Aug. 5, 2010 from MktwHulbert
"Mark Hulbert: How Congress' recess affects markets http://on.mktw.net/dsa604" 12:15 a.m. EDT, Aug. 4, 2010 from MktwHulbert
"Mark Hulbert: Wall of worry weaker after big rally http://on.mktw.net/aNRQvp" 11:53 p.m. EDT, Aug. 2, 2010 from MktwHulbert
"Mark Hulbert: August is a good month for stocks http://on.mktw.net/bY6tSD" 11:39 p.m. EDT, Aug. 1, 2010 from MktwHulbert
"Mark Hulbert: Market timers remain quite subdued about stocks http://on.mktw.net/dni9J0" 11:12 p.m. EDT, July 22, 2010 from MktwHulbert
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