Did the Presidential Cycle Top Early?

12/13/2011 2:59 pm EST

Focus: MARKETS

Donald Vialoux

Founder, Tech Talk

As many investors are aware, the third year in a president’s term are best for stocks, but Tech Talk’s Donald Vialoux discusses how he thinks this year is different.

I have talked to several people about this subject, the US presidential election cycle, and that we are in the third year of the four-year presidential term, which is supposed to be the best year. We had a huge move from late last August until late in April of about 30% in the S&P. Have we seen the third-year presidential pop for this year already?

Yeah, it’s a great question, Howard, because…well, first of all, if you want to get a real picture view of each of the markets during each of the four years of the presidential cycle, just go to equityclock.com.

Equityclock.com?

Yes. It’s a free Web site so you can get the charts right there.

Oh, great.

Historically, the strongest period during the four-year presidential cycle occurs in the third year—in other words, the year prior to the election itself. Now the reason why that happens is that usually, the president tries to do some really wonderful things to get both major parties to agree to do something positive for the economy, so that either he can get reelected or he will have his candidate be reelected next time around.

Ahh, but isn’t there a difference this year? You are from Canada, but you guys are watching what is happening in the United States. We can’t have the two parties who can’t agree on anything.

Recently, the president gave a big job speech asking for a $450 billion dollar. We got some grumblings of encouragement from the Republicans, but do you think we are really going to be able to come up with something this time around? I mean, isn’t that something that might be different?

Exactly. It is different this time, and that is the reason why the normal period of strength that we see in this current year, the year before the election, is not happening. In fact, I don’t think it will happen at all this time, so that means that we have an anomaly here. 

Why? Because the president and Republicans are just not agreeing with each other. They are going to continue to fight with each other, and the odds of reaching an agreement that helps the president are very, very slim. So therefore, that is another reason to be cautious this year, although history would suggest otherwise.

Now, there are some people who look at it and say OK, the actual strongest period is the period of six months, I think the first and second quarters of the third year and maybe also the fourth quarter of the second year altogether. I think Sam Stovall actually said that.

Yes, that is correct.

So we might have seen it already. I mean we shouldn’t count on that balance at this point, I think is what you are telling us.

Well, I think you are a bit optimistic. I don’t have a great amount of faith in what is going to happen. Now, after saying that…

I’m saying we saw that second year into the third year—we saw that kind of thing happen already.

Yeah, there was a period of strength, but again it wasn’t really a convincing kind of move in the equity markets.

A word of caution as we get into early next year: historically, the weakest period for equity markets is from April during an election year to approximately the end of October, and that is caused by a lot of uncertainty about what is going to happen going forward with economic policy and political strategy.

Next year it looks like it is going to be particularly acrimonious, and so I am looking for a recovery in the equity markets both in Canada and in the United States from October of this year right through until April. It will be a weak recovery, followed by significant downward movement in equity markets as we get from April to October of next year.

So next year, sell in April and go away.

I say buy when it snows and sell when it goes. You buy in October when it starts to snow, and you sell at the end of April when the snow goes.

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