Presidents and stocks: History suggests '09 could be a doozy
NEW YORK -- The nation's new president has been compared to FDR. His economic views go by the catchy code word Obamanomics. The transition of power at the White House is always a big deal on Wall Street — but never more so than this year with the stock market, banking system and economy in the throes of the worst crisis since the 1930s.
Enter President Obama, a politician with JFK-like charisma and high approval ratings. Wall Street and Main Street are counting on him to be Mr. Fix-it.
Not only has Obama inherited a financial mess of historic proportions, he is also facing what market historians at the Stock Trader's Almanac refer to as the "post-election-year syndrome": The first year of a presidential term has historically been the worst for stocks.
"In the four-year presidential cycle, the first year is usually the toughest," says Jeffrey Kleintop, strategist at LPL Financial.
In post-election years since 1871, the Standard & Poor's 500-stock index finished higher only 56% of the time, says Ned Davis Research. That's well below the 74% of gains in pre-election years, 69% in election years and 59% in midterm election years.
On average, stocks have risen just 2.6% in the first year of a presidential term, nearly 8 percentage points less than the 10.4% returns enjoyed in the third year of the term, which historically has been the best. That underperformance tends to occur because the incumbent president and party in power tends to prime the pump in the final two years to get the economy running on all cylinders in hopes of getting re-elected.
Hurdles confronting Obama
This year is different in that Obama must take bold steps to boost an economy in free fall. Stocks are off to a dismal start, creating ever more pressure on the president to turn things around.
Wall Street is starting to question if the $787 billion stimulus bill Obama is expected to sign into law today is enough to revive the floundering economy and job market. Investors have also expressed reservations about the bank rescue plan announced last Tuesday by Treasury Secretary Tim Geithner, mainly because it lacked details.
As if the magnitude of the financial crisis isn't challenging enough, Obama is facing other hurdles that could make it more difficult for him to overcome the post-election-year syndrome:
•Perils of popularity. Historically, presidents who entered the White House with high expectations from voters have not been rewarded with positive stock market performance in their first year, according to a study by Edward Kerschner, chief strategist at Citi Global Wealth Management.
The study found that incoming presidents with higher approval ratings than the outgoing president fared worse than "low-expectation presidents." Presidents that took office with high hopes, such as Dwight Eisenhower, Ronald Reagan, Jimmy Carter, John F. Kennedy and Richard Nixon posted median stock market declines of 9% in year one. In contrast, incoming presidents with low expectations, such as Bill Clinton, George H.W. Bush and George W. Bush, enjoyed first-year stock gains of 14%.
Given that Obama entered his term with a high favorability rating, that could suggest trouble.
"High expectations may prove to be a risk for investors in 2009," Kerschner warned in his report titled "The Perils of Popularity."
•Questions about Obamanomics. During the campaign, Obama's populist tone and promises of quick passage of a stimulus plan to revive the economy were warmly received. But in the four weeks since Obama took office, delays and questions about his plan have sapped some of the unbridled optimism.
"Before the presidential inauguration, there was a belief that Obama had a magic wand and somehow this credit crisis would reverse quickly," says Dan Clifton, head of policy research at Strategas Research Partners. "People are becoming more realistic that the stimulus package (and bank rescue plan) are not a cure-all."
A UBS report titled "Obamanomics Part V: Bank bailout plan: where's the beef?" sums up the dwindling expectations.
But perhaps the biggest challenge for Obama is that the state of the economy, job market and banking system is as bad as it has been in most Americans' lifetime.
"The reason the stock market is weak," says Paul Hickey of Bespoke Investment Group, "is that people are thinking that the problems are a lot worse than anyone expected."
Some reasons for optimism
But there are still a few bullish tidbits related to stocks and the presidency.
Both JFK and Franklin D. Roosevelt lived up to high expectations and were able to get investors to rally behind them in their first years in office. Stocks rallied 47% in 1933 under FDR after he took steps to fix the banking system after the 1929 stock crash. Stocks rose 23% under JFK in 1961 after falling 3% a year earlier amid a recession.
Perhaps more important, stocks have fared well with fresh leadership during tough times.
"During the turbulent period of the 1920s, '30s and early '40s that included the stock market crash of 1929, the Great Depression and World War II, the stock market favored challengers (like Obama) over incumbents," according to Kleintop.