History May Not Be On Our Side

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.