The most important influence on the electorate’s voting behaviour is how they perceive their economic well-being. So in the run-up to an election everything possible is done to boost the economy. Once the president is re-elected, there is usually a reality check – a reining back of the budget deficit and a couple of years of fi scal restraint. This economic manipulation is reflected in the stock market’s performance.
Some analysts question this rationale for the four-year cycle. Jeremy Grantham, an American fund manager, offers a more subtle explanation. Investors unconsciously believe that if anything were to happen to derail the stockmarket in the run-up to an election, the administration and perhaps also the Federal Reserve would step in with appropriate measures.
Confidence that the authorities would bail out the stock market if it ran into problems became known as the “Greenspan put” (after Alan Greenspan, former head of the Fed). Armed with this assurance, Grantham argues that investors usually buy aggressively ahead of a US presidential election.
Whatever the mechanics behind the four-year cycle, there is a marked difference between the performance of the stockmarket in the fi rst two years of an administration and that of the second two years. According to The Stock Trader’s Almanac, the last two years of the 43 administrations since 1833 have produced cumulative gains in the Dow Jones Industrial Average (based on Cowles and other indices before 1896) of 743% compared with gains of 228% in the fi rst two years of these administrations. Over this period the average gain over the pre-election and election years is 17% a year compared with 5% a year in the post-election and midterm years.
Seasonal trends
Another regular feature in stock markets is the seasonal trends. There is usually a strong run-up to the end of the year which can continue through to January. Often this is followed by a period of consolidation or even a correction before the market pushes higher again until May, when it is surprising how often the old adage “sell in May and go away” proves correct.
After a lull over the summer months, trading activity picks up again and there can sometimes be a short rally, but investors tend to be constrained by the prospect of the autumnal squalls which regularly buffet stockmarkets during September and October. Once safely through the autumn, investors settle into the end-of-year rally.
Read More : The four-year cycle Of Stock Market
