Also see our Economic Commentary which supplements the Laufenberg Economic Quarterly and primarily focuses on more recent economic developments.

This page is designed to offer you my perspective on economic fundamentals, ranging from business cycles to yield curves. It will provide more detailed economic analysis than is generally available in the Quarterly. For the most part, the essays provided here will attempt to discuss timely fundamental issues related to the forecast but are expected to have a longer shelf life than the content on either the Quarterly or Commentary pages. I hope that over time you will consider the information on this page as a source of reference when debating economic issues in the future.

Daniel E. Laufenberg, Ph.D.


Equities and the political calendar
(February 7, 2012)

Given that 2012 is a presidential election year, it seems appropriate to examine whether the political calendar has a statistically significant impact on the stock market. That is, is it reasonable to expect the stock market to perform significantly different in an election year than in any other year of a president’s term of office? For that matter, is there any year of a president’s term of office on average that offers a better total return on equities than any other? The answer to both questions is no, even though a casual examination of the average total returns for each year of the president’s term of office appears to suggest otherwise.

As shown in Table 1, the average total return on equities, as measured by the total return of the S&P 500, for each of the four years of the 20 presidential terms from Hoover (1929) through the second term of G.W. Bush (2008) was 8.3% for the first year, 8.9% for the second year, 17.7% for the third year, and 9.3% for the fourth year. At first blush, it looks as if the third year of a president’s term represents an outlier, and as such an opportunity for the S&P 500 to outperform the other years. However, this casual observation would be misleading to investors who decided to overweight equities only in the third year of a presidential term of office.

Based on a more rigorous statistical analysis of the return data, it is impossible to say with any meaningful degree of confidence that the stock market’s performance in the third year of a president’s term will always differ from the other three years. The method used is known as the analysis of variance, which is a simple and reliable method of determining the appropriate pooled error variance for comparison purposes. It also provides a single test of the null hypothesis that the population means are identical, which in this case are the average total returns for each of the four years of a presidential term of office.

The analysis suggests that the null hypothesis cannot be rejected. The reason for this is that the volatility of returns between years of the same term year is similar to the volatility of the averages for the four years of a president’s term. This can be illustrated by the fact that the worst total-return year for the S&P 500 from 1929 to 2008 was in 1931 (down 43.3%), which was the third year of President Hoover’s term, whereas the best year for the S&P 500 was in 1933 (up 54.0%), the first year of President Franklin Roosevelt’s first term in office.

Also, if the historical averages alone drove expectations, the total returns on the S&P 500 over the first three years of President Obama’s current term were far different than expected. Instead of the average returns of 8.3%, 8.9% and 17.7% in the first, second and third years of President Obama’s term, actual returns were 26.5%, 15.1%, and 2.1%, respectively. Investors who were overweight equities only in the third year of the Obama administration would have missed out on two very good years in the stock market.

Moreover, the total return for the S&P 500 in the fourth year of the president’s term of office averaged 9.3% from 1932 (the fourth year of President Hoover’s term) to 2008 (the fourth year of President G.W. Bush’s second term). Hence, it should be no surprise that the average forecast for the S&P 500’s total return for 2012 from investment professionals, which is the fourth year of President Obama’s term, is about 9.0%. And the range of forecasts around this average is quite wide—from flat to up 18%. Ironically, this is actually a tighter range than suggested by the standard deviation of historical returns in the fourth year of a president’s term, which for a 95% confidence interval would range from down 23% to up 42%. In other words, there may be a cyclical pattern in market performance but the year of the president’s term is not one of them.

The details of the analysis of variance used to reach this conclusion are summarized in Table 2. The analysis of variance develops from the fact that we can make three different estimates of the population variance from the data in Table 1. Since I am assuming that all 80 observations (20 presidential terms of four years each) come from the same population, I can compute the total sum of squares of deviations for all 80 total returns, the sum of squares between the averages of returns for term year and the sum of squares between years within each term year. The mean square is the sum of squares divided by the degrees of freedom.

As noted above, this analysis yields a test that can be used to help us decide whether the average total returns for all four years of a presidential term differ statistically, called the F-test. This F ratio is defined as the mean square between term years divided by the mean square between years within the presidents’ terms. The value of F should be around one when the null hypothesis holds (that the population means are the same in all years), and should become large when the term averages differ.1 In this case, the F-test is 1.169, suggesting that the null hypothesis cannot be rejected with any meaningful degree of confidence.

This may be more easily seen by simply comparing the average return for each presidential year to the standard deviation for each year. In every case, the standard deviation is larger than the average, suggesting that the returns over the 20 years of a particular term year are very volatile. Also, as mentioned above, term averages are not very good predictors of the likely return in any one year. For example, although it was close a couple of times, none of the total returns in any of the 20 years of a particular term year have equaled the average return for that term year. The bottom line is that an election year is no different from any other year in terms of stock market performance. In other words, despite all the rhetoric to the contrary in an election year, the political calendar is irrelevant to the stock market.


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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.

Current Perspective

2012 Economic Perspectives

Equities and the political calendar
-- February 7, 2012

2011 Economic Perspectives

Is the great American job machine finally broken?
-- December 6, 2011

Recession fear, not fact
-- September 4, 2011

Core inflation: a policy guide more than a policy target
-- May, 2011

Help not wanted?
-- Feb, 2011

Special Report: Health Care Legislation:
Essay No.1 - Costs
Essay No.2 - Revenue
Essay No.3 - Budget Deficits

2010 Economic Perspectives

Causes of the financial crisis revisited
--November, 2010

A less robust U.S. Economy longer term
--August, 2010

Greece: A test of Europe's resolve to remain united
--May, 2010

The U.S. jobs machine restarting at a slower pace
--February, 2010

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