Moon's pull on tides like elections' drag on stocks

NEW YORK -- Investors already worried about the "fiscal cliff" have another reason to be uneasy as 2013 nears. The year after a presidential election tends to be a dud for stocks.

Stocks, it turns out, tend to fluctuate in a predictable pattern in the four-year span called the "Presidential Election Cycle."

"Just as the moon affects the tides, presidential elections affect the economy and the stock market, " Jeffrey Hirsch, editor of the Stock Trader's Almanac, writes in the 2013 edition's introduction.

And the first year after a presidential election is the least bullish of the four years. The Standard & Poor's 500 index has gained just an average 6% since 1926 during the post-election year, according to the Leuthold Group. The best gains typically occur in the pre-election year, when stocks climb nearly 17% on average.

In general, stock returns the first two years of a president's term are weak, followed by robust gains in years three and four. Indeed, the Dow Jones industrial average has produced a gain of 724% in the pre-election years and election years since 1833, the Almanac says. The post-election and midterm years saw total gains of just 273%.

What's behind the big discrepancy? The theory is that early in a president's term, tough choices are made, new policies are pushed through and stocks tend to suffer as a result of uncertainty and then the implementation of change.

In contrast, stocks get a lift in the third and fourth years of a president's tenure, when politicians looking to retain power make more market-friendly moves.

Will stocks follow the historical pattern and struggle in 2013, the first year of President Obama's second term?

The answer could depend on whether lawmakers can avert the economic harm that would result from the fiscal squeeze caused by automatic tax increases and spending cuts set to kick in Jan. 1, says Joseph Quinlan, chief market strategist at U.S. Trust.

Stocks could get an initial boost if a "mini" bargain is brokered in the next few weeks to avert the so-called fiscal cliff, he says. But turbulence could follow by midyear in 2013 if "Washington fails to craft a 'grand' fiscal plan" that addresses the USA's economy-eroding deficits and debt and tackles tough issues, such as the reform of entitlement programs.

Doug Ramsey, chief investment officer at Leuthold Group, expects a challenging year. His call is for a flat market next year.

One reason he is paying closer attention to the historical tendency for stocks to suffer in post-election years is the fact that the bull market, which began in March 2009, is now 45 months old and nearing its fourth birthday.

And the median lifespan of bull markets -- half have lasted longer, half shorter -- over the past 50 years is just 42 months. "The bull is aging," he says. "It has moved past its median life expectancy."

Ramsey also argues that much of the boosts to stocks from the stimulus that Obama and the Federal Reserve have thrown at the economy has subsided. An economic slowdown in China and a recession throughout most of Europe are also acting as a drag on the U.S. economy.

As a result, the economy will likely endure another year of subpar growth of roughly 2%. And even with the market trading at a below-average 13 to 14 times earnings, the valuation picture isn't nearly as attractive as it was at the market bottom in 2009, he adds. Stocks rose nearly 19% in the first year of Obama's initial term, but the market was starting its rebound from its worst drop since the Great Depression.

The election-year cycle is tough to debunk, he adds. "We tried to expose it as a fraud," he says. "But we had a hard time doing that."

USA Today