Investors already worried about the "fiscal cliff" have another reason to be uneasy as 2013 nears. The year after a presidential election tends to be a dud for stocks.
Stocks tend to fluctuate in a predictable pattern in the four-year span called the "Presidential Election Cycle."
"Just as the moon affects the tides, presidential elections affect the economy and the stock market," notes Jeffrey Hirsch, editor of the Stock Trader's Almana.
The first year after a presidential election is the least bullish of the four. In general, stock returns the first two years of a president's term are weak, followed by robust gains in years three and four.
The theory is that early in a president's term, tough choices are made and new policies are pushed through, and stocks tend to suffer as a result of uncertainty and the implementation of change. Stocks get a lift later in a president's tenure, when politicians looking to retain power make more market-friendly moves.
Will stocks follow the historical pattern and struggle in the first year of President Obama's second term?
The answer could depend on whether lawmakers can avert the economic harm that would result from the fiscal squeeze caused by automatic tax increases and spending cuts set to kick in Jan. 1, says Joseph Quinlan, chief market strategist at U.S. Trust. Stocks, he says, could get an initial boost if a "mini" bargain is brokered to avert the fiscal cliff. But turbulence could follow by midyear if "Washington fails to craft a 'grand' fiscal plan" that tackles tough issues, such as the nation's deficits and reform of entitlement programs.
Doug Ramsey, chief investment officer at Leuthold Group, expects a challenging year and a flat market. One reason for caution is the fact that the bull market, which began in March 2009, is now 45 months old. The median lifespan of bull markets over the past 50 years is just 42 months. "The bull is aging," he says.
Ramsey also argues that the boost to stocks from the stimulus that Obama and the Federal Reserve have thrown at the economy has subsided. An economic slowdown in China and a recession throughout most of Europe are also acting as a drag on the U.S. economy.
Stocks rose nearly 19% in the first year of Obama's first term, but they were rebounding from the worst drop since the Great Depression.
The election-year cycle is tough to debunk, Ramsey adds: "We tried to expose it as a fraud. But we had a hard time doing that."
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