Few presidents are re-elected during recessions

Incumbents are most likely to be re-elected during late Revival or Acceleration, to lose during Maturation, Ease-off, and Plunge

1960 – Kennedy defeated Nixon 1980 – Reagan defeated Carter 1992 – Clinton defeated Bush

Recessions rarely occur during a presidential election year

Stocks fare well during presidential election years

Three principles: Be optimistic on stocks and bonds if you are

sure the economy is not in advanced Acceleration or Maturation

Be objective about the election’s economic impact

Remember that significant investment moves are risky

Long-term rates tend to be stable – the Fed tries to keep interest rates steady around elections

Short-term rates rise modestly Investment moves during presidential election

years: Plunge or Revival – follow normal course, investment

confidence Ease-off – move into bonds and stocks earlier if you

are a risk taker Acceleration or Maturation – be confident about

trading plays if you are aggressive or high rolling

Historical record: In the 9 presidential elections from 1952 to 1984,

Treasury note yields rose 3 times, fell 3 times, and remained about the same 3 times Average fall – 37 points Average rise – 95 points

3-month Treasury bills rose 6 times, 3 were significant

Relying solely on election returns could lead to very poor investment returns about one-third of the time

Tend to rise Predictable: rose during every election

year from 1952 to 1984 except for 1960 Investment moves:

Aggressive – invest additional 5% in stocks High roller – invest additional 10% in stocks Conservative – no additional investment

Presidents set the tone for the markets Pro-business presidents produce the

best stock and bond market performance

Presidents with more government involvement produce better performance for speculative vehicles

Percent Change in the S&P 500*

Total Monthly Monthly Ranking

Eisenhower Up 118.5 1.2 2

Reagan Up 45.5 0.8 3

Ford Up 36.8 1.3 1

Johnson Up 32.2 0.4 4

Kennedy Up 13.2 0.4 4

Carter Down 15.4 0.3 5

Nixon Down 65.1 1.0 6

*Adjusted for inflation

Money market yields: measured by the 3-month Treasury bill, show same pattern as long-term yields

Misery Index – sums unemployment rate and inflation

Effective federal tax rate on family income - ultraversion of the misery index

Eisenhower has lowest average ultramisery index, Reagan has greatest improvement

President Average Index

Rank

Harry Truman 7.87 5

Dwight Eisenhower 6.26 1

John Kennedy 7.27 3

Lyndon Johnson 6.78 2

Richard Nixon 9.98 7

Gerald Ford 15.93 10

Jimmy Carter 16.27 11

Ronald Reagan 12.19 9

George H. W. Bush 10.68 8

Bill Clinton 7.80 4

George W. Bush 7.98 6

Economic views – pro-growth and anti-inflation should have a positive impact on the economy

World opinion Selection of Vice President Sense of humor

Long-term solutions rather than short-term quick fixes

Control the federal budget deficit

Prices improve in response to major peak & decline of interest rates

After rally is under way, it is later reinforced by an economic upturn

Since 1950’s Stocks turned up on average of 4 months

before each recovery Stocks fell on average 10 months prior to

economic downturn

Stock market sells off when rates rise or indicators suggest they will soon

However stocks will not act negatively when rates are rising slower than inflation and economic activity is strong

Lower rates boost stocks unless business activity is very weak or rates are declining slower than inflation

Rising inflation is bad for stocks when interest rates are rising at a faster rate

Disinflation is bullish for stocks except when rates are falling slower

Metal and commodity stock prices respond positively to inflation

While retail, food, etc. stocks decline

React mainly on a short term basis Stocks tend to react the greatest to industrial

production, retail sales, payroll employment, GNP, durable goods orders, and the Index of Leading Economic Indicators

To a lesser degree housing starts, building permits, construction spending, agricultural prices and other more specific industry indicators

Bonds dislike accelerating inflation and welcome slower inflation

PPI Index gets the most attention from bond markets

Bonds yields tend to rise when MS growth accelerates and fall when MS growth decelerates

As the economy become more sluggish, bond reactions become increasing positive

As a result bonds perform best late in a recession and early in a recovery

Gold is very profitable during persistent rises in inflation and can be a profitable alternative during times when stocks and bonds perform poorly

Best time to buy is when economic conditions are strengthening during acceleration and maturation

Rallies tend to be long and are intensified by sharp oil price increases

Recessions are time to watch from being caught in a gold market trap, as gold has very brief rallies that are followed with dramatic drop-offs.

Inverted yield curve does not foretell a recession YC may remain inverted for a long time before a

recession begins Recessions have begun without YC inversion Inverted YC have not always led to recession

Steepening of the YC indicated the economy will strengthen, inflation will heat up and the next move in rates will be up

Economic life cycle can be seriously disrupted but is very unlikely to be repeated, took place during Carter’s credit controls of 1980

Puts upward pressure on interest rates and inflation

Deficit is inflationary Increased government spending does not increase

the supply of consumer goods Budget financing methods often lead to faster MS

growth Deficits are negative only when the economy is

strong During acceleration and maturation, upward

pressured on rates and inflation is aggravated by the deficit even if it is shrinking

Balanced budget would help the economy Deficit reduction would lead to higher

investment in both capital equipment and housing, and other economic benefits

As financial markets knowing well in advance what was to come, would lower rates before the pain caused by lower government spending

Will the budget ever be balanced?

The most predictable quality of the economy is its volatility

Official actions by the government don’t usually solve economic problems

Focusing on a single investment vehicle or indicator is asking for trouble

Rosy economic conditions do not always provide the best investment environment

No two economic cycles are alike The U.S. economy is not an island The long view works

Once you have established a set of beliefs that work, stay with them

Do not take any risk so big it makes you uncomfortable, stick with your beliefs & limits

When in doubt, depend on your own experience not on the advice of others