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Thursday
Feb142013

Stock Markets in a President's 2nd Term

 

As we reflect on our founding fathers this President's Day, you might wonder what history shows us about a US president's second term and the US economy and stock market.

President Obama joined an exclusive club when he won his second presidential election last November. . About half of US presidents serve for more than one term. President Obama is the 14th president to join that club.

The Economist analyzed the US economic performance during 2-term presidents in the modern era (since 1901) based upon an equal-weighted index of economic factors. See the chart below. Generally presidential second terms have been economically weaker than the first. About a quarter of the time the economic factors turned out to be more positive than the first term.

How will the next four years turn out for us? Some thoughts: 

  • History, it is said, does not repeat but often rhymes. It would seem that this may be a mark against the prospects for the next four years. Keep in mind that a data set of eleven does not make a statistically significant sample set.
  • It may not be surprising that economic performance declined for second term presidents. A relationship between strong economic performance and better reelection prospects for presidential candidates is often referenced. With that in mind, the second term may be a reversion to the mean.
  • On an optimistic note for the future, presidents who have stepped into office during weaker economic times such as Ronald Reagan and Bill Clinton went on to stronger economic times in their second term. The economic environment from 2008-2012 seems to fit in with these historic times.
  • Two factors in the calculation, unemployment rates and housing prices, may be set up in current conditions for positive momentum even if the change is incremental and not immediate.
  • The analysis notes that stock market performance was especially strong in a president’s first term falling off in the second term: average market returns were almost 10% in the first term and less than 3% in the second term. This is something to keep an eye on as we proceed through the next four years. What were stock market returns in President Obama’s first term? 14.58%*.

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2011 and 2012, Melissa was honored by Financial Advisor magazine in the inaugural Research All Star List. In addition to her frequent contributions to Money Centered blogs, she writes frequent investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.


Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

* S&P 500 returns measured from 12/31/08 to 12/31/12. The S&P 500 represents a broad index of the 500 largest companies in the US publically traded stock market.
Required Disclaimer: Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Melissa Joy, CFP® and not necessarily those of RJFS or Raymond James