Third year's a charm for returns, says study

That effect may be aided by the Federal Reserve Board’s willingness to maintain an accommodative monetary policy during the latter stages of the president’s term, according to the study, titled “The Presidential Term: Is the Third Year the Charm?” which is to be published in The Journal of Portfolio Management.

Stocks generally languish during the first two years of a presidential term and prosper during the final two years, according to authors Robert Johnson, managing director of the education division at CFA Institute; assistant finance professor Scott Beyer of the University of Wisconsin Oshkosh College of Business in Oshkosh, Wisc. and finance professor Gerald Jensen of Northern Illinois University College of Business in DeKalb, Ill.

“Policy makers are reluctant to assume a restrictive stance in the months leading up to a presidential election,” said a press release on the study.

Third-year returns have been nearly triple the average return earned during the first, second and fourth years over a 48-year period, the study found.

Returns for presidential third years between 1957 and 2004 average 23.8%, compared to 6.9%, 4.9% and 13.3%, for the first, second and fourth presidential years, respectively, the study said.