 Few presidents are re-elected during recessions  Incumbents are most likely to be re-elected during late Revival or Acceleration, to lose during Maturation, Ease-off, and Plunge

 1960 – Kennedy defeated Nixon  1980 – Reagan defeated Carter  1992 – Clinton defeated Bush  Recessions rarely occur during a presidential election year

 Stocks fare well during presidential election years  Three principles:  Be optimistic on stocks and bonds if you are sure the economy is not in advanced Acceleration or Maturation  Be objective about the election’s economic impact  Remember that significant investment moves are risky

 Long-term rates tend to be stable – the Fed tries to keep interest rates steady around elections  Short-term rates rise modestly  Investment moves during presidential election years:  Plunge or Revival – follow normal course, investment confidence  Ease-off – move into bonds and stocks earlier if you are a risk taker  Acceleration or Maturation – be confident about trading plays if you are aggressive or high rolling

 Historical record:  In the 9 presidential elections from 1952 to 1984, Treasury note yields rose 3 times, fell 3 times, and remained about the same 3 times  Average fall – 37 points  Average rise – 95 points  3-month Treasury bills rose 6 times, 3 were significant  Relying solely on election returns could lead to very poor investment returns about one-third of the time

 Tend to rise  Predictable: rose during every election year from 1952 to 1984 except for 1960  Investment moves:  Aggressive – invest additional 5% in stocks  High roller – invest additional 10% in stocks  Conservative – no additional investment

 Presidents set the tone for the markets  Pro-business presidents produce the best stock and bond market performance  Presidents with more government involvement produce better performance for speculative vehicles

Percent Change in the S&P 500* TotalMonthly Monthly Ranking EisenhowerUp ReaganUp FordUp JohnsonUp KennedyUp CarterDown NixonDown *Adjusted for inflation

 Money market yields: measured by the 3-month Treasury bill, show same pattern as long-term yields  Misery Index – sums unemployment rate and inflation  Effective federal tax rate on family income - ultraversion of the misery index  Eisenhower has lowest average ultramisery index, Reagan has greatest improvement

PresidentAverage IndexRank Harry Truman7.875 Dwight Eisenhower6.261 John Kennedy7.273 Lyndon Johnson6.782 Richard Nixon9.987 Gerald Ford Jimmy Carter Ronald Reagan George H. W. Bush Bill Clinton7.804 George W. Bush7.986

 Economic views – pro-growth and anti-inflation should have a positive impact on the economy  World opinion  Selection of Vice President  Sense of humor

 Long-term solutions rather than short-term quick fixes  Control the federal budget deficit

 Prices improve in response to major peak & decline of interest rates  After rally is under way, it is later reinforced by an economic upturn  Since 1950’s  Stocks turned up on average of 4 months before each recovery  Stocks fell on average 10 months prior to economic downturn

 Stock market sells off when rates rise or indicators suggest they will soon  However stocks will not act negatively when rates are rising slower than inflation and economic activity is strong  Lower rates boost stocks unless business activity is very weak or rates are declining slower than inflation

 Rising inflation is bad for stocks when interest rates are rising at a faster rate  Disinflation is bullish for stocks except when rates are falling slower  Metal and commodity stock prices respond positively to inflation  While retail, food, etc. stocks decline

 React mainly on a short term basis  Stocks tend to react the greatest to industrial production, retail sales, payroll employment, GNP, durable goods orders, and the Index of Leading Economic Indicators  To a lesser degree housing starts, building permits, construction spending, agricultural prices and other more specific industry indicators

 Bonds dislike accelerating inflation and welcome slower inflation  PPI Index gets the most attention from bond markets  Bonds yields tend to rise when MS growth accelerates and fall when MS growth decelerates  As the economy become more sluggish, bond reactions become increasing positive  As a result bonds perform best late in a recession and early in a recovery

 Gold is very profitable during persistent rises in inflation and can be a profitable alternative during times when stocks and bonds perform poorly  Best time to buy is when economic conditions are strengthening during acceleration and maturation  Rallies tend to be long and are intensified by sharp oil price increases  Recessions are time to watch from being caught in a gold market trap, as gold has very brief rallies that are followed with dramatic drop-offs.

 Inverted yield curve does not foretell a recession  YC may remain inverted for a long time before a recession begins  Recessions have begun without YC inversion  Inverted YC have not always led to recession  Steepening of the YC indicated the economy will strengthen, inflation will heat up and the next move in rates will be up  Economic life cycle can be seriously disrupted but is very unlikely to be repeated, took place during Carter’s credit controls of 1980

 Puts upward pressure on interest rates and inflation  Deficit is inflationary  Increased government spending does not increase the supply of consumer goods  Budget financing methods often lead to faster MS growth  Deficits are negative only when the economy is strong  During acceleration and maturation, upward pressured on rates and inflation is aggravated by the deficit even if it is shrinking

 Balanced budget would help the economy  Deficit reduction would lead to higher investment in both capital equipment and housing, and other economic benefits  As financial markets knowing well in advance what was to come, would lower rates before the pain caused by lower government spending  Will the budget ever be balanced?

 The most predictable quality of the economy is its volatility  Official actions by the government don’t usually solve economic problems  Focusing on a single investment vehicle or indicator is asking for trouble  Rosy economic conditions do not always provide the best investment environment  No two economic cycles are alike  The U.S. economy is not an island  The long view works

 Once you have established a set of beliefs that work, stay with them  Do not take any risk so big it makes you uncomfortable, stick with your beliefs & limits  When in doubt, depend on your own experience not on the advice of others