The Lagging First Year

S&P thinks stocks will rise somewhat more than is typical at this point in the presidential cycle

By Joseph Lisanti

The calendar year immediately following a U.S. presidential election is not usually a strong one for the stock market. Since 1949, the S&P 500 has risen only 3.6%, on average, in the first year of a President's term.

In addition, the probability of a gain in the first year of the presidential cycle is the lowest of all four years. Since Harry Truman sat in the Oval Office, only half of the 14 presidential first years have seen gains in the S&P 500.

The numbers are slightly better when you look at the first year of second presidential terms after World War II. Before George W. Bush, four postwar presidents were reelected: Eisenhower, Nixon, Reagan, and Clinton. The average gain in the "500" for the first year of their second terms was 6.4%. But the percentage of up years was the same: Only two of the four years were positive for stocks.

We believe that the S&P 500 will perform somewhat better than has been typical in the first year of a second term. Our yearend target for the index is 1300, or 7.3% higher than its 2004 close. Although stocks have pulled further away from that target since 2005 began, we remain generally optimistic. That may seem a bit naïve in the face of a record November trade deficit, OPEC's scheduled January 30 meeting to discuss production cutbacks, rising interest rates, and a declining dollar. Nevertheless, there are some positive factors: The declining dollar should eventually stabilize (though not eliminate) our trade deficit. We believe it is in the interest of OPEC members to avoid oil price increases so high that they cut off economic growth in the developed world. And interest rates, though headed up, are still low enough to spur the economy.

We think that corporate earnings, now being released, will show an 18% year-over-year fourth-quarter profit gain for the S&P 500. In our opinion, investors should react favorably.

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

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