War and the Presidential Cycle
The third
year of the presidential cycle usually sees
a strong market. Does war change the pattern?
Although
it's hard to tell by looking at the stock market, the economy
is not doing too badly. With monetary stimulus in place and fiscal
stimulus on the way, we expect the U.S. economy to show improvement
as the year unfolds.
Yet, the economy is
far from the thoughts of most investors, in light of the potential
clash with Iraq. The anticipation of an armed conflict with Baghdad
has left investors with little appetite for investment risk now.
This is the third year
of President George W. Bush's term. Traditionally, the third
year in the presidential cycle is the strongest as elected officials
(both the President and Congress) try to boost the economy to
improve their chances of re-election. Since 1946, the third year
of the presidential cycle has seen the S&P 500 post an average
gain of 17.4%, far in excess of the average gains of 3.6%, 4.3%
and 8.6% see in the first, second and fourth years of the cycle,
respectively.
But with war apparently
imminent, can the third year of the presidential cycle still
be a good one for stocks? To find out, we looked at the performance
of the S&P 500 since 1946 in those third years of a presidential
term when U.S. troops were involved in a war.
The wars and years
in question are the Korean War (1951), Vietnam War (1967 and
1971) and Gulf War (1991). On average, the "500" gained
18.4% in these years somewhat better than the overall track record
in third years of presidential cycles. The average masks a large
variation in results, ranging from a gain of 26.3% in the year
of the short-lived Gulf War to a rise of 10.8% in 1971 when the
public was growing weary of the endless morass of Vietnam.
Since 1946, in every
third year of a presidential cycle when the U.S. was at war,
the stock market rose. Keep 65% of investment assets in equities.
Source: Standard
& Poor's The Outlook, 55 Water St., New York, NY 10041,
1 year, 48 issues, $298. Visit the web site at www.spoutlook.com.
