- Final year of a two-term cycle ranks worst by S&P 500 return
- Lack of stimulus is to blame for lackluster performance
Among the many rationales given for the drubbing in U.S. equities this year, one that is rarely mentioned is the election cycle. Maybe it should be.
Research from Ned Davis Research Group shows that the last year of a two-term presidency ranks dead last by returns, with the Standard & Poor’s 500 Index posting a median decline of 6.6 percent since 1953. Coincidentally or not, with President Barack Obama preparing for his final months in office, shares are off to the worst start since 2009, sinking 5.1 percent in January.
While the data isn’t definitive, showing three down years and one up as presidents left, they suggest the rising potential for drama as the will to launch fresh stimulus wanes and new candidates jockey for attention. In a market driven by oil, China and interest rates, the elections have started to creep into the discussions as Iowans began the first-in-the-nation caucuses Monday.
“I could make the argument that risk aversion is going to go up because of uncertainty in the election,” said James Abate, who helps oversee $1 billion as chief investment officer at Centre Funds in New York. “At the end of the second term when you have an open election, particularly if the vice president is not running, your view of the market is going to be a very challenging one.”
S&P 500 futures expiring in March fell 0.4 percent at 8:16 a.m. in London. At Monday’s Iowa Republican caucuses, Senator Ted Cruz of Texas won over billionaire Donald Trump, while Democrat Hillary Clinton was clinging to the narrowest edge over Senator Bernie Sanders of Vermont.
Obama is the fifth president to reach to an eighth year since 1953. The S&P 500 slumped 38 percent when George W. Bush was in office in 2008, lost 10 percent in Bill Clinton’s final year in 2000, and was down 3 percent when Dwight D. Eisenhower was in power in 1960. The exception was Ronald Reagan in 1988, when the index rose 12 percent.
One reason that stocks performed poorly in those times is there was a lack of incentive by presidents to boost the economy, according to Ed Clissold, chief U.S. strategist at Ned Davis. The firm compiles an index designed to track tailwinds from monetary and fiscal policy and finds it falls 1.6 percent in the eighth year, the second-worst of the cycle.
“Presidents have complained about their lame duck status late in their second terms,” Clissold wrote. “Equity investors should complain that presidents’ lack of incentive to stimulate the economy for re-election have dampened returns.”
Clissold said 2016 may prove an anomaly from the perspective of stimulus. Congress in December passed a $1.1 trillion spending measure that ends a 40-year-old ban on crude oil exports and includes some tax breaks for businesses and individuals. The larger question is whether that’s offset by the Federal Reserve, which raised interest rates for the first time in almost a decade.
While the sample is precious little for a definite conclusion, the two last bull markets ended in the eighth year of a president’s term. More than $7 trillion was erased from equities in 2008 when the S&P 500 sank to its worst annual return since the Great Depression. In 2000, a 10-year bull market in which the S&P 500 quadrupled saw its first cracks, with the index sliding 49 percent by October 2002.
“As for the last year of a two-term presidency, there could be a connection to the president being a lame duck that year, making it hard to accomplish anything,” said Howard Ward, who oversees $42.7 billion as the chief investment officer of growth equities at Gamco Investors Inc. “Presidents are like sit-coms, after seven years, the public is tired of you no matter how much they loved you in the early years.”
Stocks plunged to begin the year, falling as much as 9 percent by Jan. 20 for the worst start to any year on record. Even with a rebound in the period’s last days, last month saw more market value erased in American equities than any January in data going back three decades.
One of the issues at stake for investors in the election may be the independence of the Fed, whose seven years of monetary stimulus have helped propel one of the longest bull markets in history, according to Barclays Plc. Republican presidential candidates, including Cruz and Senator Marco Rubio, have shown support to an effort to scrutinize Fed independence.
“One of the key issues for the 2016 election has been economic anxiety, as voters are increasingly worried about the state of the U.S. economy and the prospects for a more prosperous future,” Jonathan Glionna, head of U.S. equity strategy research at Barclays, wrote in a note Monday. “We sense that investors are watching the proceedings closely but are not altering investment allocations in response. This could begin to change as the primary season commences.”