Is the Presidential Election Cycle Over?

10/05/2011 3:00 pm EST

Focus: MARKETS

James Stack

President, Stack Financial Management

The third year of a president's term has historically been very bullish for the markets, but that may be changing because the government is finding it harder to spend its way to good feelings, Jim Stack of InvesTech Research explains in this exclusive interview with MoneyShow.com.

A lot of people, including yourself, have spoken about the presidential election cycle. The third year before a presidential election is supposed to be the best. However, we had quite a big pop from last August 2010 through the end of April 2011.

Exactly.

Have we seen this already? Or is there more to come?

Well, if you go back and look at election cycles historically, there's always the debate: Will it do better under a Democratic president or a Republican president? Or if one starts pulling ahead in the polls, there's really no statistical correlation in the market doing better under one party versus the other, even if they start pulling ahead in the polls.

What is interesting is that if you look at the presidential election cycle, typically the third year, the one we're in, is the best-performing year of the four years. The problem is that we had such good gains in 2009 and 2010 that I think it took a lot of the oomph out this year. We started off strong but we gave back all of the gains of the year.

I still think we're going to finish on more of a positive note. What's interesting is that the presidential election year, the next year, in 2012. Recessions are an extreme rarity going into a presidential election year. If we don't dip or drop back into a double dip recession in the next couple of months, I think we're going to make it through next year without a recession.

Over half of the recessions began in the year following a presidential election year, so 2013-at least from a historian's standpoint-would be the year to probably watch out for.

Now, just to be devil's advocate here, maybe this time is different for the following reasons. The reason the people look at the presidential election cycle, the third year, is because the President and Congress start spending money like crazy, start having all kinds of plans that either create jobs or start facilities and districts or things like that, just to look good going into the election year. That ain't happening this time.

That's exactly right. That's not happening and it's not going to happen.

The other thing, though, to keep in mind is right now, it is a very vulnerable economy, and it's like flying a 747 jumbo jet at just about stall speed. It's very vulnerable to cross winds.

When you throw a cross wind like this debate about raising the debt limit, it really caused a lot of fears, it caused a lot of uncertainty, and increased the possibility that we could affect economic growth and take it into stall speed.

At the same time, if we don't drop into a recession or if we don't see more warning flags in the next couple of months, one thing Congress is not going to do next year is tighten up on the economy. They're not going to raise taxes. They may reduce spending, but not current spending. They're not about to do that.

They're going to put in place a plan to basically reign in the growth in government and spending out over the next ten years. I think for the next 12 months, we may not get any stimulus, but we're certainly not going to get any tightening from Congress or especially from the Federal Reserve.

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