INSIGHTS

On November 01, 2010

Presidential Cycles

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With the midterm elections, many expect to see the traditional shift back to a more centrist, some might say stalemate, environment. As we had noted a year ago, the mandate a majority party feels often reverses course and a new ruling party is put in place. Once again, history repeats itself.

Recall that the new administration came in with the widest spread in popularity in the last 50 years. The popularity spread is the approval rating difference between the outgoing President and incoming President. According to a Citigroup analysis done in January of 2009, some interesting perspectives come to light:

• Of the five new presidents that were labeled new comers, only JFK’s presidential period provided a decent environment for equity returns.
• We witness a very interesting period that high expectations are often met with tepid equity returns, while low expectations were met with more positive equity returns. The quote from Elliot Larson comes to mind; “Anger always comes from frustrated expectations.”

As has been documented extensively, though little has been made mention of recently, the typical equity returns during the 4-year presidential cycle looks to be a significant force considering the change in voter sentiment.

Dow Industrial Change in Presidential Cycle: Median Return

Source: Citigroup Investment Research. See Charts/Graphs Disclosure.

A perfect storm of higher equity returns appears to be on the horizon, in our opinion. Combining a severe change in voter sentiment, historical Pre-Election returns, a Federal Reserve bent on inflating assets and with nearly 79% of S&P 500 reporting companies exceeding expectations, it seems the more muted expectations might just be exceeded once again.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.