Average Return of Dow Jones in Presidential-Election Years: 5.4%
Stocks are up and this is an election year. History shows a correlation. On average, since 1896, stocks do especially well in the third and fourth years of a presidential election cycle. Under Obama, the Dow Jones Industrial Average appreciated 19 percent during his first year as president, 11 percent in the second and 5.5 percent in the third, which averages the biggest gains of a president's term. With about a 6.5 percent price gain this year, the Obama presidency has enjoyed about a 46 percent rise in the Dow since 2009. By comparison, in George W. Bush's first term, the Dow closed down 7 percent the first year, fell another 17 percent the next and rebounded the next two years -- 25 percent and 3 percent, respectively. Still, his first term ended pretty much where it started -- with no gain at all.
Photograph by Joshua Roberts/Bloomberg
Why It Matters
One of the explanations often proffered for strong third-year market performance is that politicians try to juice the economy ahead of election-year balloting to boost their odds of being re-elected. After two market losing years, President George W. Bush, for example, pushed through tax cuts in 2003 and stocks rose strongly. Last year, Obama, faced with the possibility of a U.S. default, pushed through extensions on the payroll tax suspension and unemployment benefits. The result: Despite tough times, stocks were up.
Graphic by Charlos Gary/Bloomberg
What It Means for Your Portfolio
If there's a cause-and-effect link between election cycles and equities, the next couple of years may be grim. If gridlock prevails, the Bush tax cuts and the extended payroll tax cut will expire and more than $1 trillion in budget cuts will take effect at the end of 2012. That would create what Federal Reserve Chairman Ben S. Bernanke has called a "massive fiscal cliff of spending cuts and tax increases." It would also, according to the Economic Policy Institute, cut GDP growth from 2.6 percent to 1 percent in 2013 -- an abrupt slowdown that could lead to an unhappy stock market.
Photograph by Andrew Harrer/Bloomberg