Fail to the Chief? By Spencer Jakab

Welcome back from Presidents Day to a holiday-shortened but eventful week for markets. A number of economic talking heads will opine on rates or bank regulation, but the main event wlll be the release of the minutes of last month's Fed meeting. They'll give investors a better sense of why the central bank held rates steady and how long it will stand pat. We'll also get quarterly updates from Walmart and China's Alibaba on Thursday. Friday will see the results of closely watched surveys on U.S. services, manufacturing and consumer sentiment.

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George Washington never dreamt that his birthday would become a national holiday well known for mattress sales. He would be almost as surprised to hear that the president of the United States has become the most powerful person on the planet.

Of all the world's democratically elected leaders, none have as much effect on the global economy. That's why investors who steer clear of flimsier stock-market timing rules like "sell in May" still acknowledge the Presidential Cycle . It's a good time to brush up on it.

The worst years for U.S. stocks have been a president's first one, which we are in. The best by far have been his third year.

The Stock Trader's Almanac has data going all the way back to Andrew Jackson, 48 presidential terms ago. Based on just price changes in the Dow Jones Industrial Average, and other sources before then, owning stocks only during the third year of an administration would have made an investor 23 times as much as owning them just the first year.

You only have to be a little cynical to understand why: Even though presidents technically don't have the power of the purse, they can influence the timing of things like tax cuts, military engagements, regulations and, of fresh relevance, tariffs.

No president wants to see unemployment rise or that proxy for economic health, the stock market, take a hit during his time in office. But every commander in chief has plans that are bitter medicine for some. Many also fail to deliver on campaign promises that sounded too good to be true because they were. Year one is the best time for bad news.

Voters have short memories and presidents aren't graded like college students whose C-plus freshman year hurts their GPA as much as an A-minus when they're a junior helps it. They're more like high schoolers who can redeem themselves on college applications by showing improvement.

Is the Presidential Cycle still valid, though? The last four first-year performances all have been stellar, averaging an S&P 500 total return of 27%. Presidents Obama and Biden entered the White House amid copious economic stimulus following crises. Meanwhile, Trump's 2017 tax-cut plans were frontloaded.

This year could be more typical. First, consider the setup: The S&P 500 already had an annualized return of 25% between Biden's disastrous debate performance last June and Inauguration Day-the "Trump Trade." And no president has entered office with stocks more expensive on a cyclically adjusted basis .

A short-term danger for stocks is President Trump's haste to impose tariffs. Heard on the Street's Aaron Back points out that during his first term tax cuts came first and a trade war later. What's more, the 2017 tax cuts already exist. Agreeing this year to extend them won't have as much impact.

What to do? Trying to time the market is almost never wise. Instead, consider recent laggards-value stocks. They've returned an average of 12% in presidential first years since 1929 writes fund manager John Buckingham in The Prudent Speculator, a newsletter, trouncing growth stocks' annualized 6.4%.

In a historically challenging year, value could help investors sleep a bit better at night.

Stocks I'm Watching

Constellation Brands : The brewer of Corona and other Mexican beers has been under pressure this year due to Trump's tariff threats, flagging U.S. alcohol consumption and a poor set of quarterly results . It got a huge premarket lift, though, on news that Warren Buffett's Berkshire Hathaway had bought its shares.

Domino's : And what goes better than beer with pizza? Shares of takeout chain Domino's also were up on news that Berkshire, an existing shareholder, upped its stake.

Rheinmetall : Trump administration officials sent shock waves through Europe at the Munich Security Conference last week suggesting the region might be on its own in terms of defense. Key beneficiaries in Europe's equity markets are defense-related stocks . Rheinmetall shares are up more than 50% year-to-date and were higher again on Tuesday.

Intel : The troubled chip maker's shares have been on a tear, rising by nearly 24% last week. They got another lift in premarket trading on reports over the weekend that Broadcom and TSMC could break the company up.

Argentina : You might have missed it since the country has been excluded from the mainstream emerging markets index, but Argentina has been the world's best-performing stock market the past couple of years thanks in part to the policies of firebrand president Javier Milei . Yesterday, though, stocks plunged after Milei appeared to have promoted a cryptocurrency that surged and then quickly lost value, prompting a legal investigation.

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"The current stock market resembles a still lake with perilous currents swirling beneath the surface."

While S&P 500 volatility has been contained, the stocks that are part of it have been bouncing wildly says Heard on the Street columnist Jon Sindreu. Drops in some have offset surges in others. In Wall Street lingo, "dispersion" has risen. On Jan. 29 the Cboe S&P 500 Dispersion Index hits its highest since May 2022. The danger is that, if this trend unwinds, the S&P 500 will take a big hit.

What I'm Reading Elon Musk's Department of Government Efficiency is seeking access to data systems within the Internal Revenue Service that house personal taxpayer information. ( WSJ ) Meme stocks, crypto and options bets-investors are spotting signs of market froth as the long bull market continues. (WSJ ) Will Trump's crypto cops still police fraud? This flashy startup poses a test. ( WSJ ) Dowdy no more, Walmart is winning new customers and has gained e-commerce mojo. That's why it's trading more like a tech stock than a big-box retailer. Heard on the Street's Aaron Back discusses the changed perception with WSJ's "Take On the Week" podcast. ( WSJ podcast ) DeepSeek sent Nvidia to a record-breaking loss of market value. Heard on the Street's Dan Gallagher argues it did the chip maker a favor. ( WSJ ) Beyond the Newsroom

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About Me

My name is Spencer Jakab and I've been musing about money and markets for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

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February 18, 2025 06:33 ET (11:33 GMT)

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