The Denver Broncos winning the Super Bowl and the poor market performance in January lead some market observers to conclude that we are in for a rocky year in the stock market. The believers in the Super Bowl Theory of the stock market and adherents to the maxim "As January goes, so goes the rest of the year," are trying to convince us there is little hope for a positive market year. Should investors simply sit out 2016 or is there hope for the rest of this year?
Now the two major current obsessions of investors are Federal Reserve's monetary policy and the circus we call the presidential election. We all know that rising interest rates have typically been bad news for stocks, while the superstitious among us believing that an original American Football League team winning the Super Bowl portends a poor market year. But, what does history tell us about stock returns in a presidential election year and the years following?
The existence of a presidential election cycle theory on markets -- that returns are lowest in the first half of a president's term and markedly higher in the second half -- has been advanced for many years. Indeed, on average, the best two stock market years of a president's term have been years three and four. The basic premise is that our elected leaders want to get the bad news out early in their terms, so they (or their party) stand a better chance of getting reelected. Some even contend that fiscal policy actions are more heavily back-end loaded in a president's term.
From 1929 through 2015, the average stock market returns in years one, two and four of Presidents' administrations have been remarkably consistent. The S&P 500 has returned 9.4%, 9.0%, and 9.7%, in years one, two and four, respectively. The outlier has actually been year three with a robust return of 17.0%.
Obama has been a groundbreaking president on many fronts, and his relationship with the stock market is consistent with that profile. You have to go all the way back to Hoover and the second Roosevelt administration to find lower year three returns than each of Obama's year-three returns. In 2011 and 2015, the S&P 500 returned a paltry 2.11% and 1.38%, respectively. Despite that, the market has returned an average of 15.3% in the first seven years of Obama's tenure in the White House. So much for "the third year is the charm."
Investors would be delighted if Obama's year-four return during his second administration is like the year-four return in his first administration when stocks advanced a healthy 16%. We certainly don't want a repeat of George W. Bush's disastrous second term year-four return of negative 37.0% -- the worst year-four return in history. And, even Bill Clinton's second term year four return was a negative 9.1%. Let's hope those particular points of history doesn't repeat themselves.
This article is commentary by an independent contributor. Robert R. Johnson is president and CEO of the American College of Financial Services. At the time of publication, the author held no positions in the stocks mentioned.