Opinion: Not even Donald Trump can save the stock market
The Presidential Election Year Cycle has turned negative
Reuters CHAPEL HILL, N.C. (MarketWatch) — Here's more bad news for this already beleaguered bull market: The so-called Presidential Election Year Cycle has turned negative.
Not until the July-September quarter of next year will this cycle once again forecast above-average stock market returns.
This, no doubt, will come as a surprise to casual followers of the Presidential Election Year Cycle, since its premise is that politicians, regardless of party affiliation, go to great lengths to make sure the economy is booming on Election Day. But the historical record tells a different story: The 12 months before a presidential election tend to be disappointing ones for the stock market.
As you can see from the accompanying chart, the stock market's best quarterly returns are concentrated at the beginning of the third year of the four-year cycle. (The chart is based on the Dow's quarterly returns since its creation in the late 1800s, and focuses on fiscal years beginning Oct. 1.)
Historically, the quarter we're in currently, along with the next two, have produced only modest gains. And this string of three mediocre quarters is followed by a big down quarter — the biggest loss, on average, of any quarter of the entire four-year cycle.
Might the equity market be able to wriggle out from underneath this now-negative cycle because President Obama is in his second term? That seems plausible, since a second-term president presumably operates with different re-election incentives than a first-term president.
But the historical record doesn't bear out this hope. If the Dow during the current quarter and the next three lives up to its comparable four-quarter average of past second-term presidents, the index will be 2.7% lower in mid-2016 than it was at the beginning of this month. And, remember, it doesn't matter which party is in the Oval Office. So it wouldn't matter if Donald Trump, whose slogan is "Make America Great Again," were somehow elected.
An additional worry traces to the Federal Reserve's extraordinary monetary stimulus since the 2008-2009 financial crisis. Because stimulus historically has been more associated with the period immediately preceding Election Day, it's certainly possible that the Fed has transferred into past years what Fed-induced strength the market would otherwise benefit from in coming months.
If so, it becomes a distinct possibility that the market over the next year will underperform the already depressed expectations of the Presidential Election Year Cycle.
In any case, it can't be good news for stocks that the bull market has lost one of its strongest supports.
Posted by: sarah_oz@yahoo.com
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