Thanks, Mr. President

This is the third year of U.S. president George Bush’s current term in office. Not everyone is happy about that fact, but if you’re an investor, you should be thrilled. That’s because the third year of any U.S. president’s term seems to be a tonic for the markets, says Steve Foerster, professor of finance at the University of Western Ontario. On average, the TSX has jumped up by a stunning 15.8% during the third year of presidential terms over the last 50 years. “What’s really interesting,” Foerster says, “is that since 1956 there has not been a single negative year three.”

Foerster is director of the prestigious MBA program at the Richard Ivey School of Business in London, Ont., and he’s not the kind of investor who consults Super Bowl games or the phase of the moon to time his buys. He says he has confidence in the presidential cycle because there’s a rational explanation for the effect. “Year one is a bit of a honeymoon period for the president,” he observes. “Year two is when the administration will take any bad medicine — so they can get the bad news out of the way while there’s still a lot of time before re-election. In year three, the administration works towards having the party re-elected, and actively manages the economy so that by the time the election rolls around, people are happy.”

The presidential cycle has become such an accepted indicator that the Canadian research department of the giant Swiss bank UBS has begun advising clients to tilt towards stocks — especially cyclical stocks such as metals, minerals, oil and gas — in year three of the cycle. A UBS report issued in November notes that on average, metals and minerals have surged by 24.3% in the third year of the presidential cycle, and concludes that “in 2007 market gains should be solid with cyclical sectors leading.”

Still, even valid indicators only work on average — you can’t depend on them to work each and every year. As well, the fact that Bush is not standing for re-election himself and the fact that his party no longer controls the U.S. House of Representatives and the Senate could dampen the effect this year. So will Foerster take the plunge and go heavy on stocks in 2007? “I’m still doing my assessment at this point,” he concedes. “I’m not sure.”