Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

The Presidential Cycle and Real Returns

Instead of using the consumer price index (CPI) as a deflator, if we use the change in price of gold in dollars as a deflator, a different picture emerges. Table 9.2 shows the gold-adjusted returns of the Standard & Poor's (S&P) 500 Index with third years beginning in 1975 and the subsequent presidential election result in the following year.

Table 9.2 Real Investment Returns and Election Results

Year	Third-Year Wealth Effect	Election Result
1975	82.44%	Incumbent lost
1979	−47.72%	Incumbent lost
1983	46.44%	Incumbent won
1987	−15.48%	Incumbent successor won
1991	42.68%	Incumbent lost
1995	36.25%	Incumbent won
1999	20.02%	Incumbent successor lost
2003	7.33%	Incumbent won
2007	−20.03%	Incumbent successor lost
2011	−6.53%	?

During the period of their study, the third year still has stunning average real returns of 24.76 percent including 2003 in the calculation. But if we include 2007 and 2011, the overall average falls to 16.27 percent. Still, this is more than the 10 percent above the average arithmetic real return of 6.08 percent in that time frame for all years. Much more concerning is the third year average of −10.96% over the last three presidential terms, and the trend: 2.48 percent in 2003, −14.37% in 2007, and −20.99 percent in 2011. This is consistent with the observation of Robert Albertson of Sandler O'Neill & Partners regarding the stimulus packages that we as a nation are now spending five times as much ...