The Leap/Election Year Phenomenon

The US economy is slowing, which would argue for falling prices. Yet crude oil is making new highs, gold is nearing $1,000 and cereal is becoming a luxury item now that spring wheat is up 90% in this year alone. What’s going on here? Well, I finally have an explanation for the market: it’s a leap year!

Leap years are needed to keep our calendar in alignment with the earth's revolutions around the sun. To do so, one extra day must be inserted, or intercalated (this is a new word for me and I am going to try to use it more!), at the end of February. A leap year consists of 366 days, whereas other years, called common years, have 365 days. In the Gregorian calendar, the calendar used by most modern countries, the following three criteria determine which years will be leap years:
Every year that is divisible by four is a leap year;
of those years, if it can be divided by 100, it is NOT a leap year, unless
the year is divisible by 400. Then it is a leap year.

Of course this is no ordinary leap year, because in February, 2008, we have enjoyed five Fridays–the month begins and ends on a Friday. Between the years 1904 and 2096, leap years that share the same day of week for each date repeat only every 28 years. The most recent year in which February comprised five Fridays was in 1980, and the next occurrence will be in 2036. I hate to bring this up, but in 1980, the average inflation rate for the year was 13.58%. On the other hand, the Dow Jones Industrial Average closed at 963.99, up 14.97% for the year, so maybe we’re on to something.

Perhaps it’s not the leap year at all, but the phenomenon known as the Presidential Cycle, where the fourth year of a President’s term, which is also an election year, is better than the other three. After analyzing the average election year S&P 500 data for 19 election years, from 1928 through 2000, Investopedia.com found that the average election year monthly return was 16.2%, compared to 12.88% for all years. If the trend holds, we could see a rising market this summer because most of the gains in leap/election years occur from June-August.

The leap/election year spike has often been attributable to the fact that often the fourth year of the cycle is when lawmakers shower voters with stimulus packages intended to increase disposable income and when the Fed has a propensity to lower interest rates. Sound familiar? Before you get too giddy, I am here to remind you that there could be a price to be paid for all of this fun. Most of the worst recessions and depressions occur the year following an election, when according to The Traders' Almanac, the “post-Presidential Election Syndrome” kicks into gear, a condition in which the U.S. economy suffers from a collective fiscal hangover. Of course, there are always new trends that break old cycles, but I couldn’t resist rolling out all of this arbitrary data to celebrate Leap Year, 2008!