Hulbert Examines Presidential Election Year Cycle

In his latest column for MarketWatch, Mark Hulbert  offers some interesting — and encouraging — data involving the “Presidential Election Year Cycle”.

According to the PEY Cycle, the third year in a president’s term is often the best for the stock market. (President Obama’s third year would thus start at the end of the current quarter.) Noting that some top bearish strategists, including Jeremy Grantham, have cited the cycle as reason to expect gains for the market, Hulbert does his own analysis.

His findings: Using the end of the third quarter as the start of a presidential year, Hulbert found that year 3 has indeed been the best year for stocks, going back to 1896. In fact, the 15.5% average return for the market during third years of presidents’ terms nearly doubles the next-highest year (which is Year 1, at 8.8%).

Hulbert adds that he ran statistical tests to see if the performance of the market leading up to Year 3 had an impact on the results. And he checked to see if valuations had an impact on Year 3 performance. In both cases, they did not impact the results. Year 3 performance was strong regardless of the market’s recent performance, and regardless of the market’s valuation going into Year 3.