Playing the Presidential Cycle

Although it is off to a slow start, the market still is likely to post decent results this year

By Joseph Lisanti

As we have noted before, the third year of a presidential term is generally the best for stocks. Since the end of World War II, the S&P 500 has never suffered a loss in the full calendar year before a presidential election.

By the time the third year of a president's term arrives, politicians are eager to pass legislation intended to improve the economy and, in turn, the stock market. In theory, when voters' purses are full, they will gratefully return the supposedly responsible incumbents to office in the upcoming election. Given the still-struggling U.S. economy, this year that is likely to mean a tax cut and perhaps spending in the form of some sort of prescription drug benefit for older Americans.

So far in 2003, the market has not acted according to precedent for the third year in the presidential cycle. In the first quarter, the S&P 500 declined 3.6% vs. an average postwar first-quarter gain of 7.5% in a president's third year in office. The only other decline for that quarter in the modern era was in 1947, when the market lost 0.85%.

The first half of the cycle's third year usually is better than the second half. From 1947 through 1999 (the most recent third year for which we have complete first-half data), the "500" gained an average of 13.3% in the first six months of year three and 4% in the last six months.

Just to keep pace with the postwar average, the index would have to reach 996.84 by June 30. That could be a stretch for stocks this year. S&P's Investment Policy Committee expects the "500" to end 2003 at about 985.

Even though it looks to us like a below-average third year of the cycle, stocks should still post decent gains before yearend. That's why we still believe investors should maintain 65% of their portfolios in stocks.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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