×

Obama Proving Why 3rd Yr. Presidential Cycle Trade Works

The Presidential cycle stock market theory is playing out perfectly right now as President Obama faces the reality of so many of those before him in the third year of their first term following a mid-term setback: tax-cuts and loose money win elections, spending cuts do not.

“News out of Washington continues to be growth-friendly-deficit-unfriendly, with a competition to see who can cut taxes more,” said Ethan Harris, Bank of America Merrill Lynch North American Economist, in a note. “Taxes trump deficits.”

While many seasonal and other historical stock patterns receive more ridicule than followers (i.e. “Sell in may and go away.”), the election cycle trend is hard not to acknowledge. The S&P 500 averages a total return of 19 percent in the third year of a Presidential term, according to Strategas Research, with the market higher 12 months out from a mid-term election on every occasion since 1938.

President Barack Obama delivers a statement on the US economy to the press in the Rose Garden at the White House in Washington, DC, on September 15, 2010.
Jewel Samad | AFP | Getty Images
President Barack Obama delivers a statement on the US economy to the press in the Rose Garden at the White House in Washington, DC, on September 15, 2010.

The reason it may work is because the President at the time changes from the ideology that got him elected to the wallet-friendly and market-friendly measures that will get keep him from being a dreaded one-termer, no matter what the long-term cost. Backdoor political pressure is usually applied to keep monetary policy loose as well.

Bank of America points to Obama’s addition of a payroll tax cut, less stringent inheritance tax and business-friendly depreciation rules to the Bush tax cuts extension bills as evidence of the President’s “dramatic Clintonesque turn.” He’s followed that this year with the appointment of JPMorgan executive William Daley as chief of staff and “business friend” Gene Sperling as head of the National Economic Council. Not to be outdone, House Republicans answered by relaxing rules that would force any deficit increasing measure to be offset by a spending cut or tax increase.

“Deficit reduction is painful, and neither party wants to take unpopular actions that could hurt their chance of taking the White House,” wrote Harris.

Right on cue, the S&P 500 started 2011 with a 1.1 percent weekly gain. Most Wall Street strategists expect a double-digit return out of the benchmark this year, with many citing the election cycle as one of the reasons.

“You can only create consumer wealth via house appreciation, tax cuts or stock market appreciation,” said Joseph Terranova, Virtus Investment Partners Chief Market Strategist and a ‘Fast Money’ trader. “You can forget about housing, so taxes and the market it is.”

Market returns in the first or second year of a Presidential term usually underperform the other years as the country pays for the excesses of the third year, according to the theory. However, the U.S. may be able to avoid this fate if Europe’s and Asia’s woes continue.

“Taxes can trump deficits if Portugal and Spain and Italy and wherever-else continue to threaten the Euro,” said Nicholas Colas, chief market strategist for BNY ConvergEx group. “If, however, the dollar weakens rapidly and oil prices spike as a result, then this scenario is harder to support. You will get inflation and a drop-off in consumer spending.”

* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

______________________________________________________
Got something to say? Send us an e-mail at fastmoney-web@cnbc.com and your comment might be posted on the Rapid Recap! If you'd prefer to make a comment, but not have it published on our Web site, send your message to fastmoney@cnbc.com.

Trader disclosure: On January 10, 2010, following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour owns (AAPL); Seymour owns (BAC); Seymour owns (F); Seymour owns (FXI); Seymour owns (GE); Terranova owns (GM); Terranova owns (C); Terranova owns (VRTS); Terranova owns (UPL); Terranova owns (PEP); Terranova owns (OXY); Terranova owns (GS); Terranova owns (LTD); Terranova owns (CNQ); Terranova owns (PVH); Terranova owns (CVI); Terranova owns (GLD) puts; Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman's firm is short (XRT); Finerman's firm is long S&P puts; Finerman's firm is long Russell 2000 puts; Finerman owns (AAPL); Finerman owns (BAC); Finerman's firm owns (BBY); Finerman owns (BP); Finerman's firm owns (BP); Finerman's owns (GOOG); Finerman owns (HPQ); Finerman's firm owns (HPQ); Finerman's firm owns (IBM); Finerman owns (JPM) and (JPM) leaps; Finerman's firm owns (JPM) and (JPM) leaps; Finerman owns (MSFT); Finerman's firm owns (MSFT); Finerman's firm owns (WMT); Jon Najarian owns (AA), is short (AA) calls; Jon Najarian owns (AAPL), is short (AAPL) calls; Jon Najarian owns (APOL) put spreads; Jon Najarian owns (BAC), is short (BAC) calls; Jon Najarian owns (BBY), is short (BBY) calls; Jon Najarian owns (F), is short (F) calls; Jon Najarian owns (GM), is short (GM) calls; Jon Najarian owns (GS), is short (GS) calls; Jon Najarian owns (IBM), is short (IBM) calls; Jon Najarian owns (MOS), is short (MOS) calls; Jon Najarian owns (MSFT), is short (MSFT) calls; Jon Najarian owns (NFLX), is short (NFLX) calls; Jon Najarian owns (ORCL), is short (ORCL) calls; Jon Najarian owns (RIMM), is short (RIMM) calls

For Joe Terranova
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSVI)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (FCFS)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (KRC)
Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (LPHI)
Virtus Investment Partners Owns More Than 1% Of (NCRI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (SUBK)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of (CLB)

For Brian Kelly
Accounts Managed By Kanundrum Capital Own (TBT)
Accounts Managed By Kanundrum Capital Own (YGE)
Accounts Managed By Kanundrum Capital Own (FCX)
Accounts Managed By Kanundrum Capital Own (MON)
Accounts Managed By Kanundrum Capital Own (ANDE)
Accounts Managed By Kanundrum Capital Own (GLD)
Accounts Managed By Kanundrum Capital Own (JPM) puts
Accounts Managed By Kanundrum Capital Are Long USD
Accounts Managed By Kanundrum Capital Are Short The Euro
Accounts Managed By Kanundrum Capital Are Short The Yen
Accounts Managed By Kanundrum Capital Are Short (XLF)

For Betsy Graseck
(C) may be deemed to control Morgan Stanley Smith Barney LLC due to ownership, board membership, or other relationships. Morgan Stanley Smith Barney LLC may participate in, or otherwise have a financial interest in, the primary or secondary distribution of securities issued by (C) or an affiliate of (C) that is controlled by or under common control with Morgan Stanley Smith Barney LLC.
Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of (BNY), (C), (KEY), (NT), (PNC), (USB), (WFC)
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from (AXP), (BAC), (BNY), (BBT), (COFI), (C), (DFS), (FITB), (JPM), (KEY), (NT), (PNC), (USB), (WFC)
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from American Express Company, Bank of America, Bank of New York Mellon Corp, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Northern Trust Corp., PNC Financial Services, Regions Financial Corp, State Street Corporation, SunTrust, U.S. Bancorp, Wells Fargo & Co..
Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from American Express Company, Bank of America, Bank of New York Mellon Corp, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Northern Trust Corp., PNC Financial Services, Regions Financial Corp, State Street Corporation, SunTrust, U.S. Bancorp, Wells Fargo & Co..
Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: American Express Company, Bank of America, Bank of New York Mellon Corp, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Northern Trust Corp., PNC Financial Services, Regions Financial Corp, State Street Corporation, SunTrust, U.S. Bancorp, Wells Fargo & Co..
Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: American Express Company, Bank of America, Bank of New York Mellon Corp, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Northern Trust Corp., PNC Financial Services, Regions Financial Corp, State Street Corporation, SunTrust, U.S. Bancorp, Wells Fargo & Co..
Morgan Stanley & Co. Incorporated makes a market in the securities of American Express Company, Bank of America, Bank of New York Mellon Corp, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Discover Financial Services, Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Northern Trust Corp., PNC Financial Services, Regions Financial Corp, State Street Corporation, SunTrust, U.S. Bancorp, Wells Fargo & Co..
The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report.

For Adrianne Shapira
(TGT), (WMT), (KR), (SWY), (COST) Are Clients Of Goldman Sachs
(TGT), (WMT), (KR), (SWY), (COST) Received Non-Investment Banking Securities Related Services, Non-Securities Services From Goldman Sachs In Past 12 Months
(TGT), (WMT), (KR), (SWY) Received Investment Banking Serviecs From Goldman Sachs In Past 12 Months
Goldman Sachs Received Compensation From (TGT), (WMT) , (KR), (COST), (SWY) In Past 12 Months

For Mike Khouw
Cantor Fitzgerald and Co is a market maker in (AAPL)
Cantor Fitzgerald and Co is a market maker in (VZ)

For Romit Shah SOT
Nomura Securities Inc. is a market maker in (AMD)

For Dennis Gartman SOT
Funds Managed By Dennis Gartman Were Short The Euro on 1/10/2011

For Craig Berger
FBR Capital Markets & Co is a market maker in (INTC)
FBR Capital Markets & Co is a market maker in (NVDA)

GE is the parent company of CNBC
NBC Universal is the parent company of CNBC