How the Third Year of a Presidential Term Affects the Markets

Whether or not you're happy with the current president, there is cause for some financial celebration. History suggests that the third year of a presidential term has been lucrative for investors, with the S&P increasing by an average of 20.98%. Over the last few years, actions taken by the Fed can be seen as a game changer, but let's take a look at the presidential patterns. The numbers suggest that the second half of a presidential term is generally better for the stock market. From 1957 through 2012, average return on the S&P 500 for the first year is 7.13%, on the second years it's 6.39% and in the third it's 20.98%. We can see the same pattern for small stocks. The index has generally seen returns of 12.76% in the first presidential year, 6.29% the second and 31.98% in the third year.The traditional explanation generally comes down to variations in taxation and spending policies. Presidents seems to want to get the tough stuff out of the way early on and generate more lucrative years as their party seeks re-election later in the term. Historically the Fed's monetary policy also seems to be more accommodating during the third presidential term. But that could all change in 2015. Interest rates will definitely be the deciding factor this year as opposed to the political calendar. So the real issue for presidents is managing uncertainty in the face of real time trends. The outlook may seem positive but as we all know, the changes come quickly.