Visualization of the Stock Market Across the Typical Presidential Term
Posted in Calendar Effects, Political Indicators
May 17, 2010
What is the typical cumulative return profile for the U.S. stock market over the four-year presidential term? Using monthly closing levels of the S&P 500 Index from December 1952 through April 2010 (14+ presidential terms), we find that:
The following chart plots the average cumulative return of the S&P 500 index across the four years of the presidential term (Y1-Y4) for the entire sample period based on monthly data (M12=December). The return profile indicates that all of Y1 and most of Y2 tend to be approximately flat. Strong gains follow from late in Y2 to two-thirds through Y3. Moderate gains ensue through the end of the term.
For comparison, the chart includes a plot of the cumulative return of the S&P 500 index for the 2009-2012 presidential term through April 2010. This current term is atypical.
Is the average behavior persistent over time?
The next chart shows the average cumulative return of the S&P 500 Index across the four years of the presidential term for two equal subperiods (seven terms each), 1953-1980 and 1981-2008, again based on monthly data. The shapes of the two profiles appear similar enough to warrant cautious belief in some persistence.
In summary, evidence from a small number of presidential terms supports some cautious belief in three typical phases of the U.S. stock market: (1) flat at the beginning; (2) strongly advancing in middle; and, (3) moderately advancing at the end.
