THE American economy, and the American stock market, tend to do much better when a presidentâ??s term is nearing an end than they do when the term is beginning. If that pattern continues, the news from both Wall Street and Main Street may get better over the next two years.
For the stock market, the sweet spot is usually the third year of a presidential term, which is 2011 for the Obama administration. The stock market often leads the economy, and that seems to be the case in presidential cycles. The fourth year, on average, has seen the most economic growth.
The pattern is not perfect, of course. The stock market recorded only small gains in 2007, the third year of George W. Bushâ??s second term as president, and there was no economic growth the following year, as a severe recession got under way.
Still, in the years from 1946 through 2009, 62 percent of the American economyâ??s growth came during the final two years of presidential terms, compared with 38 percent in the first two years. A third of the growth came in the fourth years.
The stock market pattern was even more marked. An investor who owned stocks during the third years of terms, and stayed out of the market during the other years, would have earned profits more than twice as great as those that went to an investor following the opposite strategy, owning stocks in all but the third years.
Obviously many things that affect the economy are unrelated to presidential terms, and happen whether or not the government wants them to. Mr. Bush did not want the financial crisis to be the defining event of the last two years of his term, and Mr. Obama has been bitterly disappointed by how slow the recovery has been.
But presidents do have choices to make, and they do matter. One popular theory has been that presidents approaching re-election, or nearing the end of their second term and hoping to have their performance ratified by keeping the White House in the same party, are more likely to find ways to stimulate the economy and thus spur both growth and share prices. Tough economic policies can wait.
Until this week, it appeared that might not happen in 2011. Both parties were proclaiming a devotion to reducing budget deficits despite the weak recovery. But President Obama and Republican leaders reached an agreement that largely adopted tax cuts supported by both parties and added in the extended unemployment benefits favored by Democrats. The economic impact is likely to be stimulative.
The accompanying charts show performance of the stock market and the economy by years of presidential terms since World War II. The stock market figures show the total return of the Standard & Poorâ??s index of 500 stocks, adjusted for inflation. Investors suffered losses in only one third year, 1946. The median rise after inflation during third years was 18 percent. By contrast, the market has gone down more often than it has risen during second years of terms.
The economic figures are based on annual change in gross domestic product, adjusted for inflation. During the 64-year period, the compound average gain was 3.2 percent a year. But most years in the first half of terms fell short of that total, and just half of the third years went up by that much. But three-quarters of fourth years were above average.
The subpar fourth years were 1956, 1960, 1980 and 2008. In three of those years â?? all except 1956 â?? the incumbent party lost the White House.
There are other patterns evident in the data. Most years in the 1980s and 1990s saw better-than-average economic growth. But in only one of the 10 years from 2001 though 2010 â?? 2004 â?? was growth at least 3.2 percent. Over the same period, the stock market did not keep pace with inflation.
Floyd Norris comments on finance and the economy on his blog at nytimes.com/norris.
Read Full Article »