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

The MoneyWeek Podcast with Russell Napier at the Library of Mistakes
Investment strategy

The MoneyWeek Podcast with Russell Napier at the Library of Mistakes

Merryn talks to Russell Napier about Edinburgh’s Library of Mistakes, the age of debt and financial repression, plus why he has never invested in Chin…
27 May 2022
What to buy as the tech-stock bull market crashes
Tech stocks

What to buy as the tech-stock bull market crashes

The decade-long bull market in tech stocks has come to a rapid halt. Investors need to distinguish solid stocks from speculative ones rather than just…
27 May 2022
What sardines can teach investors about today's markets
Investment strategy

What sardines can teach investors about today's markets

A California tale of “eating sardines” and “trading sardines” can help us divide investments into speculative and real, says Merryn Somerset Webb. Som…
26 May 2022
Is it time to pick up growth stock bargains yet?
Investment strategy

Is it time to pick up growth stock bargains yet?

If you’re thinking of picking up some bargains from the tech stock crash, beware – there are still plenty of “growth traps” out there. John Stepek exp…
26 May 2022

Most Popular

The world’s hottest housing markets are faltering – is the UK next?
House prices

The world’s hottest housing markets are faltering – is the UK next?

As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. The UK’s turn will come, says John Stepek. But will …
23 May 2022
The Federal Reserve wants markets to fall – here’s what that means for investors
Stockmarkets

The Federal Reserve wants markets to fall – here’s what that means for investors

The Federal Reserve’s primary mandate is to keep inflation down, and lower asset prices help with that. So, asks Dominic Frisby – just how low will st…
25 May 2022
Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?
Investment trusts

Scottish Mortgage Investment Trust has fallen hard. But is now the time to buy?

After a spectacular couple of decades, the Scottish Mortgage Investment Trust has fallen by almost 45% so far this year. Rupert Hargreaves asks if no…
26 May 2022