Down stock market in 2011 might continue in 2012

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There are few sure things in the financial world, but a rising stock market in the third year of a presidential election cycle has long been pretty close.

In the last 80 years, the Standard & Poor’s 500 index has fallen only twice in Year Three, and hasn’t declined at all since 1939. (See chart below.)

Since 1945, the S&P has risen an average 15.9% in Year Three, far outpacing the 6.3%, 5.3% and 5.7% gains in Years One, Two and Four, respectively. The data-crunching comes courtesy of Sam Stovall, chief equity strategist at Standard & Poor’s Corp. in New York.

Well, you can probably guess where this is headed.

Barring a late-year rally, the S&P appears headed for its first Year Three downturn of the modern era. The index is off about 3.5% this year, although the Dow Jones industrial average is clinging to a 2% gain.


The logical next question: How does the market do in Year Four after a less-than-stellar Year Three? The answer: Not so well.

Since 1927, there have been six times that the S&P either fell or rose less than 10% in Year Three. On five occasions, the decline continued the following year, according to Stovall.

The reasoning: Stocks typically rise in Year Three as investors anticipate that the sitting president and Congress will try to stimulate the economy in advance of the election.

But if investors don’t get excited enough to push up stock prices in Year Three, they’re downright gloomy in Year Four.

Investors, of course, can only hope that the precedent doesn’t hold in 2012. And Stovall said the market might break with history, thanks to solid corporate earnings growth.

‘While history is a great guide, it’s never gospel,’ Stovall wrote in a report to clients.


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-- Walter Hamilton