Bearish Grantham says political cycle can help stocks – for now

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US presidents tend to stimulate the economy so the labour market is looking healthy in the six-month run-up to election time

US president Joe Biden: market data say presidents tend to stimulate the economy so the labour market is looking healthy in the six-month run-up to election time. Photograph: Saul Loeb/AFP via Getty ImagesThere are many reasons to be bearish, says long-time bear and GMO founder Jeremy Grantham, but one complicating factor might keep stocks afloat for now – the fact politicians like being re-elected.

Grantham is talking about the US presidential cycle and the tendency of US presidents to stimulate the economy so the labour market is looking healthy in the six-month run-up to election time. Looking at data going back to 1932, he notes that for seven months of the presidential cycle, from October of the second year through April of the third year , stock returns are equal to those of the remaining 41 months of the cycle. Put another way returns are six times higher than normal.

A fluke? No, says Grantham, who says this has less than one-in-a-million probability of occurring by chance. Perhaps this effect is now fading away, the way market anomalies often do when they become more widely known? Again the answer is no – cycle returns over the last 45 years have been about as powerful as the previous 45 years.

 

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