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October 25, 2016 at 10:30 AM
The rising power of the Federal Reserve has rendered the presidential cycle of market investing largely dead, according to Jeremy Grantham, the chief investment strategist of asset manager GMO.
“They are constantly looking for excuses to push down on interest rates and drive asset prices higher to get some wealth effect. I don’t trust them any more to play the easy presidential cycle,” Grantham said in a recent interview with the Financial Times.
The GMO founder, based in Boston, has shown through research dating back to 1932 that the third year of a president’s term could top those of the other three years of their leadership.
On average, U.S. stocks improve about 0.2% each month in the first, second and fourth years of a presidential cycle. However, in the third, stocks return an average 0.75% to 2.5%.
“The presidential cycle owed everything to the Fed. The Federal Reserve, completely innocently, always decided to come to the aid of the party in power,” said Grantham.
The general theory he has described entailed revving up the economy in the third year of a president’s term, so that the economic benefits would be felt as votes were cast in the fourth year. Stock markets, which generally signal anticipated economic developments, tend to move up ahead of this growth in year three, according to Grantham.
The Federal Reserve board members did not take action to stimulate the economy earlier in the cycle “or everyone would have forgotten about them by year four,” he states.
