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Bulls Get Excited About the Presidential Cycle

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The third year of the four-year presidential cycle is consistently more bullish than the other three years. Will it work again in 2011?

S&P’s Sam Stovall points out that, since 1945, the market has risen on average 17% during the third year and has done so 94% of the time.

“There is a benefit to following the 16-quarter presidential cycle,” Stovall told us for our recent article, Betting on the Relationship Between Stocks and Political Cycles.

Today, in his morning missive, Dr. Ed Yardeni of Yardeni Research asks why the third year is the charm for stocks.

He notes that newly elected and reelected Presidents tend to believe that they can walk on water. No matter how puny their margin of victory, he says, they are inclined to pretend that they were given a mandate.

The President’s party in Congress tends to be emboldened by the fact that their leader is in the White House even if they don’t have both Houses of Congress. Perhaps, Yardeni says, the delusion wears off after midterm elections.

Yardeni suggests that President Obama’s new team might be more low-key and likely to find common ground with a more Republican Congress following the elections. If so, then the third-year charm might work again, he says.

The risk, however, is this: Obama hunkers down for a clash with all the new Republicans coming to Washington intent on rolling back his programs, especially ObamaCare.

“In this scenario, the happy spell could be broken as the stock market confronts the spectacle of government shut-downs, vetoes, and crippling gridlock,” Yardeni says.

Incidentally, with the congressional mid-term elections looming, CNN yesterday issued a new pool showing that the Republicans now lead the Democrats, generically, 53%-44% among “likely voters.” Further, the poll also showed that Obama’s approval rating was down to 42% - a new low - while his disapproval rating has risen to 54% - a new high. (HT: The Gartman Letter
POSITION:  No positions in stocks mentioned.