"Presidential Cycle" Stunted by the Fed says Grantham

The phenomenon of robust stock market gains during the third year of a president’s term—coined the “presidential cycle” by fund manager Jeremy Grantham—may have been “killed off” by the Fed, according to an article in the Financial Times.

Research conducted by Grantham, founder of the GMO fund management group in Boston, analyzed stock gains during the first, second and fourth years of presidential terms going back to 1932 and found that average gains during those years were 0.2% per month as compared to between 0.75% and 2.5% during the third year. This led to his prediction that the U.S. market could enter a “speculative bubble” during the third year of President Obama’s second term. In fact, however, the article states that the third years of Mr. Obama’s two terms in office were the only two years of his presidency when the S&P 500 failed to rise.

Grantham said that the “presidential cycle” existed before the Fed “became the dominant force in economics and finance and assumed enormous power,” which he suggested began with the chairmanship of Alan Greenspan. Now, he said, the central bank is “constantly looking for excuses to push down on interest rates and drive asset prices higher.” In fact, he argued, the Fed has grown so powerful over stock market returns that the “actions of politicians have been drowned out.”