Interest rates are the single
most powerful factor affecting
the stock market. As sure
as the moon causes ocean
tides to rise and fall,
interest rates cause stock
prices to do the same. Stock
prices go up when interest
rates go down, and fall
when interest rates go up.
There is another powerful
force, however, that comes
along every four years that
overrules interest rates.
It’s The Presidential Cycle.
It doesn’t matter whether
interest rates are rising
or falling, the stock market
goes up during the last
two years of a presidential
administration.
This phenomenon is neither
coincidental nor accidental.
It is the result of political
forces striving to boost
the economy. A prosperous
economy and a booming stock
market virtually guarantee
reelection of an incumbent
administration.
According to Yale Hirsch,
Editor of the 1997 Stock
Trader’s Almanac, "the last
two years of the 41 administrations
since 1832 produced a total
net market gain of 592%
compared with 79% gain of
the first two |
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years of these administrations.
The average gains were 14.4%
and 1.9% respectively.
Clearly, incumbent administrations
not only strive to look
good in the last two years
in office, but they make
the hard decisions, such
as raising taxes, during
the first two years.
The stock market rose 12%
in 1992, the year Mr. Clinton
was elected. It went up
7% in 1993, his first year
in office, and fell 2 percent
in 1994, his second year
in office. The average gain
for Mr. Clinton’s first
two years in office was
2.5%, not far from the historical
average of 1.9%.
The stock market, as measured
by the S&P 500 Index, was
up a sensational 43.0% in
the third year of Mr. Clinton’s
administration, and 22.9%
in 1996. This performance
was well above the historical
average of 14.4% gain for
the last two years in office.
Does this mean the market
will correct in 1997 and
1998? Not necessarily, but
there is very little chance
that 1997 and 1998 also
will be outstanding years
for the market. It |
