The President Effect - Too Good a president To Be True for the market?

An interesting study done by Citigroup recently tried to explore the likely market effects following the new Presidential inauguration.

The theory of the stock market “election cycle” holds that stocks tend to perform better late in a presidential term than in the immediate post-election period. The presumed causal dynamic is straightforward. Going into an election, the party in power wants a strong economy; consequently both GDP and stock prices tend to be strong in the last two years of a presidential term. Conversely, it is politically safest to restrain inflation early in a presidential term; if this requires a recession that lasts a year or so, it will set the stage for a nice economic rebound in the second half of the term — just in time for the next election.


During the four years of a President’s term, the postelection year has, historically, been the worst for stocks, with a median performance of -1%.

The median performance of the DJIA in the post-election year of eight postwar first-term Presidents was -5%.

The median performance of the DJIA in the post-election year of five “high expectation” first-term Presidents was -9%.

George W. Bush is leaving office with a relatively low job approval rating of just 34%; his successor is entering office with almost three-in-four Americans (72%) holding a favorable opinion of him. As Figure 2 illustrates, this “popularity gap” of 38% (= 72% - 34%) is the widest in the postwar period. Clearly, expectations are high for President Obama. However, those expectations may prove to be a risk for investors in 2009.