Between 1945 and 2005, the second and third quarters of the second year of a president’s term have produced the worst average returns on equity investments in the S&P 500–according to a recent study–prompting Standard & Poor’s to warn investors about their equity investments over the next six months, despite recent market strength.
The study, conducted by Standard and Poor’s Equity Research Services, showed that the average returns in the second and third quarter during the second year of a president’s term were -2.0% and -2.2%, respectively.
“If you look at the third quarter for each of the four years, it’s the worst,” said S&P’s chief investment strategist, Sam Stovall.
The average third quarter return for all four years of the presidential terms from 1945-2005 was 0.1%.
“This could be due to lack of cash inflows, people taking vacations [and not worrying about their portfolios], and analysts reevaluating their earning expectations around this time,” Stovall said.
As for why the second year of a president’s term produced the worst results (4.3% for the year), Stovall said: “Usually in the first or second year, the market is still trying to digest a new president in office. Also, if the union has a bitter pill that it needs to swallow, it will do so earlier in the term to take a loss early. They count on voters having a bad memory when the time comes for reelection.”
According to the study, only one other quarter of a president’s term produces an average negative return–the first quarter of the administration’s first year, when it is -0.3%.
With the second and third quarters approaching in the current administration’s second year, S&P has warned investors to review their strategy.
“You can do one of three things,” Stovall said. “Number one is to do nothing, but be aware of what is happening if we see a market downturn. If it happens, don’t worry, this is typical. [The second thing you can do is] sector rotate into defensive areas of the market.”
According to the report, the sectors showing the best relative performance during the second and third quarters, respectively, during the second year of a president’s term –from 1990-2005–were: consumer staples, 3.1% and -6.5%; energy, -1.4% and -5.5%; and health care, 3.6% and -0.5%.
“[The third thing you can do is] sell-out at the end of March and buy back at the end of September,” Stovall said. “We find that using this method, an investor could have improved their performance by 300 basis points and would have done so eight out of 11 times [73%]. I always say, though, what worked in the past may not work again.”
Typically, the first and fourth quarters of each year offer the best returns, with the fourth quarter of the second year averaging the highest return at 7.6%. The very next quarter, the first quarter of the second year, produced a 7.5% return.
Stovall attributed the high returns during this period to a sharp economic snap-back following liberal sell-offs in the previous weak quarters; as well as the anticipation of economic stimulus, in the form of government spending programs, typical of a president a year or so away from his reelection campaign.