Investors on both ends of the political spectrum can look on the bright side of President Bushs third year of this presidential term returns should flourish.
Between 1957 and 2004, large-cap equity returns averaged 23.8% during the third year of a presidential term, compared with only 6.9% during the first year, 4.9% in the second and 13.3% in the fourth year, according to the study, titled The Presidential Term: Is the Third Year the Charm? The full study is slated to be published in the Journal of Portfolio Management.
The difference in third-year returns was even more pronounced in the small-cap market: an average 38% in the third year, compared with 12.1% in the first year, 3.4% in the second year and 20.8% in the fourth.
The authors attribute the effect to the Federal Reserve having a more expansive monetary policy, which they define as a period where the Fed is lowering its discount rate, during the third and fourth year of a presidential term. According to the study, the Fed had an expansive monetary policy 65% of the time during the third year of a presidents term, and only 48% of the time during the first, second and fourth years.
Robert Johnson, managing director of the CFA Institute education department and a co-author of the report, speculated that this happens because the Fed doesnt want to be seen as getting involved in politics approaching an election.