"Our results show that stock prices tend to rise substantially over the two years prior to a presidential election and show limited improvement or even decline over the two years following an election," write Fred C. Allvine, professor emeritus of marketing, and Rajesh Chakrabarti, assistant professor of finance, in the report "Presidential Cycles in Stock Market Performance."
This pattern has regularly recurred over the last 40 years with two exceptions (the second terms of Ronald Reagan and Bill Clinton), according to the study. "The average investor would perhaps be prudent to keep in mind the historical pattern in stock prices over the four-year election cycle and reduce stock market exposure at this time….," Allvine and Chakrabarti caution. "Wall Street loves optimism. However, in the end, those who forget history may well be condemned to relive it."
During the last 10 four-year presidential terms, including the first of George W. Bush, two of the major stock markets indexes have, on average, yielded very modest positive returns in the first year (less than 5 percent), negative returns in the second year, boomed in the third year with an average increase of about 20 percent, and gained around 10 percent in the fourth year.
Not a chance phenomenon, the upturn in the stock market and economy during the last two years of a presidential term is usually the result of actions taken by the administration in power, the study suggests. "An improving economy and stock market over the last two years of the four-year presidential term clearly benefits the incumbent party, increasing the likelihood of re-election of the president and/or his party," Allvine and Chakrabarti write.
For example, George W. Bush implemented a series of tax cuts that stimulated the economy and drove the stock market upward during the third and fourth years of his first term - improvements that were critical to his re-election for a second term, the report notes. However, sometimes the rise doesn't require presidential action, as in the last half of President Clinton's second term when the Internet boom greatly boosted the economy and markets, the study shows.
"George W. Bush's first term stayed remarkably close to the script with very poor stock market performance during 2001 and 2002 followed by marked improvement during 2003 and 2004," Allvine and Chakrabarti write, adding that in the second term "there are concerns about the growing federal budget deficit and the record current account deficit. With no room left for further tax cuts, the market may well be poised for an encore performance of the presidential cycle."
For more information, contact Allvine at 404-894-4356 or fred.allvine@mgt.gatech.edu.
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