As a stock market rookie in the late 1970s, I started to absorb what was hen conventional wisdom.  Looking over charts of the movements of the S&P 500 over prior decades, investors had reached the conclusion that the US stock market traced out an irregular four-year pattern.  For roughly 2 1/2 years, stocks generally went up; for the following 1 1/2 or so, the went down.

There was some macroeconomic sense behind this movement.  The mandate of the central bank, the Fed, has been, and continues to be, to maintain maximum sustainable, non-inflationary growth in the domestic economy.  If the economy started to grow too fast–meaning wage inflation was starting to occur–the Fed would raise short-term interest rates to cool the economy down.  In those pre- supply chain software days, the policy change might take six months to have any noticeable effect on corporate or consumer activity.  The economy might take another year or so to slow to the point that Fed felt justified in lowering rates to keep the economy from deteriorating further.

Wall Street linked this economic rhythm with a political one–the desire of the incumbent president to create favorable economic conditions during election year–so that either he could be reelected to a second term, or at least his party’s candidate would have a tactical electoral advantage.  How would the president do so?  He would pressure the Fed to take an inappropriately stimulative stance about a year before the election so that the domestic economy would be powering along just as voters would be going to the polls.  After the election, the inappropriate stimulus was to be removed through contractionary action by the Fed.

Stock market lore revealed that every modern president did this, with the sole exception of Gerald Ford, who paid a penalty for his economic honesty by not being elected.  …which, pundits argued, made every subsequent president that much more eager to try monetary policy manipulation.

Quaint, to our 21st century eyes, but true.

Nevertheless, that’s the genesis of the idea that the first year of the new presidential term is a testing one for stocks and bonds.  Interest rates are presumed to be rising as cleanup from the late-term party of the previous election cycle begins.

Even though we’re in a globalized world today, where the US is not the only industrialized power and where economic developments in Asia, Europe or Latin American can have important consequences for the domestic economy, many Wall Streeters haven’t advanced much beyond the clichés of over a half-century ago.

The present situation in the US differs markedly from the Presidential cycle in two main respects:

–the Fed has publicly announced that it won’t be changing its current ultra-stimulative stance for at least the next 2 1/2  years

–the major impediment to growth is fiscal, the inability of Washington to reach a compromise on how to begin to pay back the large amount of debt the federal government took on during the Great Recession.

If press accounts are to be believed, a large part of the Washington gridlock comes from President Obama’s unwillingness to enter into pragmatic and meaningful discussions with Republican legislators.  He’s promised to change his ways if reelected.   Let’s hope he carries through.