An election year can give the stock market a bounce, according to a popular economic theory, but the greatest share of Millionaires say the market will remain flat for 2012.
Will the presidential election boost the stock market as it has in past election years? No, say the lion’s share of Millionaire investors who predict the markets will stay flat for 2012.
About 40 percent of Millionaires – investors with a net worth of $1 million to $5 million – appear to subscribe to the theory that the market will rally around a presidential election. This group expects the stock market to continue to grow over the next nine months and finish higher than it is now, according to a survey of more than 900 investors conducted by Millionaire Corner in late March.
A larger share – close to 49 percent of Millionaires – say the market will stay “very close” to current levels and roughly 10 percent predict the market will decline over the next nine months and finish lower. To these neutral or bearish Millionaires, the election year bounce appears more fiction than fact.
The election year bounce theory is attributed to economist Yale Hirsch who tracked a four-year market cycle synced with presidential elections. Within this four-year cycle, markets generally reach their lows around mid-term Congressional elections and rally in the president’s third and fourth years. Bloomberg News reports that since 1896 the Dow Jones Industrial Average increased an average of 3.7 percent in a president’s first year, 2 percent in the second, 9.2 percent in the third and 5.4 percent in the fourth.
The boost can come from efforts by the incumbent administration to stimulate the economy prior to the election. Pepperdine University Professor Marshall Nickles, writing in the Graziado Business Review, said, “Administrations have often yielded to the temptation to exercise fiscal policy in a manner designed to pump up the economy just prior to a presidential election and thus garner voter approval for the incumbent party. “
The predictability of these political events have led investors to assume “better times for business conditions, corporate bottom lines and stock prices” in the second half of a president’s term and a “less robust period” in the first half of the following term, said Nickles.
“Thus a four-year stock market cycle seems to have become a part of the investment landscape since the mid-twentieth century, said Nickles, who analyzed 15 market cycles from 1942 to 2002. He notes that the election year effect can be diluted by “unforeseen macro events.”