How Will the Stock Market React to Obama's First Year?

With great power, comes great responsibility. Those words to Peter Parker (aka Spider-Man) from his uncle Ben are particularly fitting these days, and not just because President Obama hooked up with the superhero in the latest edition of the popular comic.

Great popularity also comes with great expectations for the new leader of the free world. But history shows that the first year of a President’s four-year term is the worst for stocks. And leaders who are in their first term are associated with the weakest performance, according to Edward Kerschner, chief investment officer at Citigroup (C).

He noted that the gap between Barack Obama’s “favourable opinion” rating and George W. Bush’s outgoing “job approval” rating is the widest since WWII. But similarly high expectations for Presidents Eisenhower, Reagan, Carter and Nixon were, for the most part, not met in the immediate aftermath of their inaugurations. Only JFK successfully created an environment that proved favourable for stocks in the post-election year, Mr. Kerschner told clients.

“While high expectations have, historically, mostly been associated with poor equity performance in the post-election year, low expectations (Clinton, G.H.W. Bush, G.W. Bush) have mostly been associated with good performance,” he said. The idea is that low expectations leave room for upside surprise.

The theory behind the Presidential Election Cycle is simple. Going into an election, the party in power wants a strong economy. As a result, both GDP and stock prices tend to be healthy in the last two years of a presidential term. If a recession is needed to restrain inflation, that is preferable early in the term, as it should set the stage for an economic rebound in time for the next election.

Mr. Kerschner recalled that the 1960 campaign coincided with the fourth major recession since WWII. This helped to underscore Kennedy’s claim that it was time to elect a Democrat who would “get this country rolling again.” The recession had faded by the end of JFK’s first year in office, which was a positive factor for stocks. They rose 19% in 1961.

Investors might also get some solace in the fact that both Obama and Kennedy were Democrats replacing a Republican incumbent. They were also young and relatively inexperienced, but had a large working majority.

Photo: U.S. President-elect Barack Obama is pictured on the cover of a special edition Marvel Comics' weekly Spider-Man comic, in this handout released January 8, 2009. REUTERS/Marvel Comics/Handout

Comments

[Steve Selengut]

IGVSI Performance Expectations - WCM Portfolios

No investor should ever be surprised by the changes in market value that appear on his or her monthly brokerage account statements. In general, media noise throughout the month should lead to a feel for what has been going on and investors should understand that the market prices of investment securities are constantly changing.

No investor should be particularly surprised by the changes in market value that have taken place over the preceding year. In general, short-term changes in portfolio values will correlate positively with shorter-term prognostications about the economy, interest rates, and government plans for the political direction of the country.

No investor should make changes to his or her WCM portfolio based upon short-term events or media/Wall Street/Washington speculations of the impact of such events on the future direction any cycle or financial market.

Most investors back into the portfolio development process by making short-term decisions based on guesswork, hype, "insider" information, media stories, etc. Their selections are expected to "perform" (Wall Streetese for go up in price better than other similar speculations.) quickly, or at least within the calendar year of their purchase.

Most investors wind up with "buckshot" portfolios that are asset allocation confused, qualitatively questionable, diversification rule indistinguishable, and income generation not thought "aboutable".

Most investors are caught in a devious "product" trap. They think in terms of buying an investment product instead of making an investment in something of value. They believe that any upward price movement in their product choice is good, sustainable, and unrelated to anything else in their environment save the genius of this year's financial advisor.

Most investors have no use at all for any bad news that adversely impacts the market value of their investment products. Those few who learn to buy on bad news to take advantage of oversold market conditions benefit exponentially from their sound judgment. Most of these, however, forget to realize their profits.

Some investors take the time to think about where they are going before they get started selecting securities to put inside their portfolios. They distinguish between the income generation purpose of one class of securities and the realized capital gains, or growth, potential of the other, more exciting class.

Some investors have learned that the Working Capital Model (the WCM) allows them to put the extremely important asset-allocation-plan step on autopilot, so they can focus their efforts on selection, diversification, and profit taking. These investors generally know what they want (and expect) from every security they add to their portfolios.

Some investors have learned what to expect from income securities in various IRE (Interest Rate Expectations) environments and understand that price changes rarely have a negative impact on income production. Most WCM investors have been patient enough to see nearly all income securities survive severe credit market problems with only minor payout reductions, if any.

A few investors understand that they will eventually want to partially support themselves with the income their portfolios produce, and they program their decisions to assure an annually increasing level of essential retirement "base income". Few mutual fund investors even know what base income is, much less think about it.

A few WCM investors have learned how to focus on their growing base income while most mutual fund, index fund, and NASDAQ investors rely on growth in market value to somehow fund their pension plans. In the real world of cycles, dislocations, Madoffs, and credit crunches, the market value plan just doesn't do it.

A few investors try to pick and choose those elements of the WCM that they will or will not include in their approach to the securities markets. That doesn't do it either.

All investors need to become intimate with both the content of their portfolios and the workings of the various cycles that impact on security market values. They need to expect, even anticipate cyclical changes in the market values of their securities by taking reasonable profits in either classification willingly, gleefully, and without hindsight.

All investors need to plan their portfolios in a manner that allows them to add to positions at predefined, acceptable, lower price points during cyclical (and hysterical) market value downturns. Fear control allows these WCM types to create larger cash flows and more easily attainable profit-taking target levels for the eventual upswing.

All investors need to exorcise the two major Wall Street demons: (1) blind devotion to portfolio market value change analysis from one blink of the market cycle's eye to the next, and (2) focus on the length of time it takes the planet to travel around the Sun while ignoring the cyclical facts of investment life.

No person should become an investor until and unless he or she forms a set of precise expectations about the behavior of securities values--- all securities values, at all stages of the stock market, interest rate, and economic cycles.

No person should become an investor without first having established reasonable long-term goals and objectives and/or without understanding which classes and types of securities are most likely to safely move him toward achievement.

No person should be so fearful of current financial conditions that he is thinking more of loss taking than bargain hunting or that he is expecting market value growth when he should be embracing a rising working capital.

WCM people think of performance in terms of growing productive working capital and annually increasing levels of base income--- irrespective of market conditions. WCM equity investors think in terms of their completed profitable trades--- how many, average gain per trade, holding period.

WCM--- you can do it.

Steve Selengut
www.sancoservices.com/
www.kiawahgolfinvestme...
Professional Investment Management from 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

2009 Feb 06 08:49 AM