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Insights from the political calendar

Posted by: Aaron Pressman on January 7, 2008

There are many quantitative approaches for slicing and dicing stock returns to search for profitable patterns. Here on the eve of the New Hampshire primary, the good folks at CXO Advisory Group are crunching election year returns for the Standard & Poor’s 500. As has been shown many times, the third year of a presidential term generally offers the best stocks returns (see 1983, 1991, 1995 and 1999, for example) but it didn’t work so well in 2007. The fourth year offers only average returns.

CXO took the analysis a step further and broke the S&P 500 returns down by quarter — well, politically adjusted quarters, so that the fourth quarter would be the three months after an election (November through January). Looking at these thinner slices, a clear pattern emerged for the fourth year of a president’s term. Returns were mediocre, even crummy, for the first nine months before an election. We saw that trend in 2004, when stocks bottomed in July, had another little sell-off in October and finished strong. These kinds of patterns are based on only a few dozen observations, so take them with a grain of salt.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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