Why Stocks Go Up in the Third Year of an Election Cycle
Stocks go up in the third year of an election cycle. You may have heard this. While I'm always a bit skeptical of claims about patterns and cycles, apparently this one really is true. How do I know?
First, Jeremy Grantham, someone I respect and who typically makes sense, said so. There are some people I read who've proved themselves to be reliably thoughtful over time. Grantham's one of them. So I pay special attention to what he says. Second, data going back for decades shows it's true. But the data also shows something else that struck me.
Before I get to that, let's take a look at why the third year effect works. Grantham tells us that President's take measures to stimulate the economy in their third year of office. They do this because an economy that's humming along will help them get elected. And whatever you think about this artificial stimulation of the economy, it generally works - at least for a time.
And timing's everything here, because by the third year of his term, the President's starting his re-election campaign; either that, or, if he's served two terms already, he's helping his party elect the next president.
As for the data, here's something pretty interesting. If you go back to 1800, it shows that you really don't get this third year effect before sometime around the 1920's. Why? Because the government really didn't have that much to do with the economy before that - certainly not compared to today.
For example, back in 1929 government spending amounted to less than 5% of GDP. And that was already elevated from what it had been before. Compare that to today, where government spending accounts for over 40% of GDP. That's a rather astounding increase, don't you think? You can see why increased government spending effects the economy, usually in a significant manner.
So if government spending increases - and it most certainly is this year - then economic activity picks up. The stock market sees this pick-up and responds positively.
Considering the data and the logic behind it, it really does make sense for the stock market to pick up in the third year of an election cycle. The question then becomes what to do about it. Do you throw all your eggs into stocks? Well, throwing all your eggs into anything's usually a bad idea. But maybe you do increase the amount you invest in stocks this year.
Now here's something pretty interesting. Going back seven decades, stocks have averaged +22% in the third year of the election cycle. And so far this year, they're up around 2%. So if you're going to take advantage of this third year thing, there's plenty of room left, at least if the averages hold up.
Of course, that leaves you with the problem of whether you just keep that increased allocation in stocks, or you maybe trim it or pull it back out after the third year passes. My tendency would be to at least trim if not cut all the way back, unless I have some other reasons why stocks should keep going up.
So maybe we can make some money in stocks this year. At least it's not out of the question.
First, Jeremy Grantham, someone I respect and who typically makes sense, said so. There are some people I read who've proved themselves to be reliably thoughtful over time. Grantham's one of them. So I pay special attention to what he says. Second, data going back for decades shows it's true. But the data also shows something else that struck me.
Before I get to that, let's take a look at why the third year effect works. Grantham tells us that President's take measures to stimulate the economy in their third year of office. They do this because an economy that's humming along will help them get elected. And whatever you think about this artificial stimulation of the economy, it generally works - at least for a time.
And timing's everything here, because by the third year of his term, the President's starting his re-election campaign; either that, or, if he's served two terms already, he's helping his party elect the next president.
As for the data, here's something pretty interesting. If you go back to 1800, it shows that you really don't get this third year effect before sometime around the 1920's. Why? Because the government really didn't have that much to do with the economy before that - certainly not compared to today.
For example, back in 1929 government spending amounted to less than 5% of GDP. And that was already elevated from what it had been before. Compare that to today, where government spending accounts for over 40% of GDP. That's a rather astounding increase, don't you think? You can see why increased government spending effects the economy, usually in a significant manner.
So if government spending increases - and it most certainly is this year - then economic activity picks up. The stock market sees this pick-up and responds positively.
Considering the data and the logic behind it, it really does make sense for the stock market to pick up in the third year of an election cycle. The question then becomes what to do about it. Do you throw all your eggs into stocks? Well, throwing all your eggs into anything's usually a bad idea. But maybe you do increase the amount you invest in stocks this year.
Now here's something pretty interesting. Going back seven decades, stocks have averaged +22% in the third year of the election cycle. And so far this year, they're up around 2%. So if you're going to take advantage of this third year thing, there's plenty of room left, at least if the averages hold up.
Of course, that leaves you with the problem of whether you just keep that increased allocation in stocks, or you maybe trim it or pull it back out after the third year passes. My tendency would be to at least trim if not cut all the way back, unless I have some other reasons why stocks should keep going up.
So maybe we can make some money in stocks this year. At least it's not out of the question.
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