History suggests lucrative times ahead for stocks
By Adam Shell, USA TODAY
URL:http://www.usatoday.com/money/markets/us/2002-11-04-seasonality_x.htm
NEW YORK — Investors emboldened by the stock market's recent surge may have more than a potential interest rate cut to look forward to: A potent cocktail of seasonal factors looms ahead that in the past has meant good times for stocks.
History tells us the stock market is heading into a potentially lucrative period driven largely by, of all things, the calendar.
3rd year's the charm
The third year of a president's term has been good for stocks in the past. The S&P 500's total return during the third year of the following presidents' terms:
Year Return *
President Reagan 1983 22.5%
President Reagan 1987 5.2%
President Bush 1991 30.5%
President Clinton 1995 37.4%
President Clinton 1999 21.0%
* — Appreciation plus dividends
Source: USA TODAY research
Most bear markets, for example, have tended to end in the second year of a president's term, the Stock Trader's Almanac says. Similarly, stocks have been down in November just two of the past 12 midterm election years.
And with President Bush finishing up year two at the White House and the midterm congressional elections on tap for today, a continuation of those patterns would be bullish for stocks — and help extend a recovery that has lifted the Dow Jones industrials 17.6% since Oct. 9. Monday, the Dow climbed 54 points to 8572 after being up more than 200 points.
But while seasonal factors alone are unlikely to fuel a new bull run if the economy and earnings lapse back into the doldrums, they still may be strong enough to offset some of the selling pressure caused by continued economic weakness.
"Earnings, not seasonality, are the ultimate driver of stock prices," says Frazier Evans, senior economist at Liberty Funds. "But you can't help but be intrigued by the market's historical patterns."
Bullish historical patterns:
Decennial cycle. Stocks tend to fare worse in the early years of decades. In the past 12 decades, Evans notes, the Dow has posted average annual returns of 1.3% in the first five years, vs. a 12.3% gain in the later five years. "The early years of a decade are often spent correcting excesses built up in the prior decade," he says. Perhaps more important, stock returns start to improve in a decade's third year.
Monday kicked off the best six-month period for stocks. Since 1950, the Dow has gained 10,107 points in the November-April period, vs. a loss of 361 points in the six months from May to October, the Stock Trader's Almanac says.
Losing money in the third year of a presidential term is a long shot. The last time it happened? In 1939 when Franklin D. Roosevelt was president, says Victory Capital Management. Since World War II, the Standard & Poor's 500 index has averaged 21.9% total return — stock gains plus dividends — in the third year of a president's term.
The reason for the boom? "Folks in power like to stay in power," says Rich Nash, chief market strategist at Victory Capital Management. That typically means the president and his administration do what they can to get the economy humming just in time to get re-elected.
And if you don't have faith in government to jump-start a Wall Street rally, you can always look forward to the so-called Santa Claus rally and January Effect, a year-end burst of buying that often breathes life into stocks. |
