Fly on WallStreet

In the first part of the article, we looked at some evidence purporting the existence of monthly and seasonal trends in the stock market as a whole. Before diving into the seasonality of individual stocks, I'd like to take a minute to address one aspect of the annual seasonality of the market.

After last year's publication of The Only Three Questions That Count, market pundits such as Eric Bolling have been talking quite a bit about the "Presidential Term Anomaly." Basically, the "Presidential Term Anomaly" states that the third year of a presidential term is usually the best year to be invested in stocks. On page 73 of The Only Three Questions That Count, Ken Fisher (who apparently knows his stuff) has a table that lists all of the presidential administrations since 1926 followed by the corresponding annual return of the S&P 500 (which was started in '26). Fisher's study can be summarized as follows:

These figures certainly appear to substantiate the claim that the third year tends to be the best. In fact, it looks like the entire second half of a term is generally more rewarding than the first half. But why?

According to Fisher, the weakness observed in the first half of a president's term is probably due to all of the changes that a new administration is likely to impose on the country. He explains that, "Markets view the redistribution of wealth or property rights [by a new presdiential administration] like witnessing a mugging. It causes fear beyond the size of the action itself because it makes all witnesses realize that they could be mugged next. Consequently, the market can be weak somewhere in the first two years because the market doesn't like the politically forced changed." Makes sense to me.

But Fisher himself isn't terribly bullish about his findings. He continues, "I'd see its being a third year as a definite mild market positive. Would I bet the house on it? No way. If lots of people start talking about the third year being positive and getting excited about it, I'd know this phenomenon was discounted into pricing already and I wouldn't count on it at all." Efficient Market Theory strikes again. Interesting phenomenon, though.

In the third and final part of this article, we'll take a look at how seasonality affects individual stocks and how we might benefit from it.

"More on this later."