A buy signal for US stocks

History suggests the third year of every presidential term is the time to load up on American shares.

The third year of each US presidential term has consistently been bullish for US stocks especially the first seven months.

Since 1932, the market has returned an average of 17% between1 October and 30 April, equal to a gain of 2.5% per month, says Jeremy Grantham of asset manager GMO.

By comparison, the remaining five months of the year have averaged 0.75% each, while the average across the other three years of each four-year term is just 0.2%.

Of course, averages can sometimes disguise extreme outcomes, but in this case, 17 of the 20 cycles so far have had positive returns, while the worst of the three down years was a modest loss of 6.4%.

While this pattern could simply be a fluke, the odds are against it: as a result, being bullish on US stocks"may seem like a no-brainer investment" for anybody "not intimidated by the obvious simplicity of the idea", says Grantham.

So why does this market quirk exist? "The most likely explanation is thatmid-term elections tend to increase gridlock in Washington," saysEd Yardeni of Yardeni Research. "While the debt-ceiling political crises of August 2011 and late 2012 suggested that too much gridlock is bearish for stocks, it has been quite bullish historically."

It seems that America's "system of checks and balances, designed to limit the folly of our foolhardy politicians", ultimately produces outcomes that favour investors. Given that, it's notable that the latest elections produced a gridlock-friendly outcome: Republicans in control of both houses of Congress, with a Democrat as president.

This combination has historically been bullish, coinciding with the highest average return in election years, says The Economist's Buttonwood columnist almost 13 percentage points better than the worst combination of Republican president facing Democratic control of one or both houses. "These figures indicate the market is right to be relaxed."

That said, whether these patterns will work this time is an open question. Other events bode ill for markets, including the end of quantitative easing in the US, the threat of interest-rate hikes and geopolitical tensions.

"Going into this cycle there appear to be more negatives than normal," agrees Grantham, but many of the previous 20 occurrences may "have seemed that way at the time".

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The MoneyWeek Podcast: how to not lose money to inflation and financial repression
Investment strategy

The MoneyWeek Podcast: how to not lose money to inflation and financial repression

Merryn talks to Peter Spiller of the Capital Gearing Trust about how he navigated the last extraordinary year; what he's buying now; and how he plans …
16 Apr 2021
UK mid-cap stocks look forward to life after lockdown
UK stockmarkets

UK mid-cap stocks look forward to life after lockdown

The FTSE 250 hit an all-time high at the end of last week, as investors look to a post-lockdown recovery.
16 Apr 2021

Most Popular

Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021