You may have heard the terms "Third time is the Charm" or "Third time's lucky". All of these terms have some meaning. For example, "Third time's lucky" has its origin in 19th century hanging in which one would be freed up from hanging if he survives third attempt. So how does this relates to "Third Year is Best"? 2019 is third year of Presidential term and based on historic data, this is the best year for markets. Since 1950, markets are up 100% of time in third year. On an average they are up by close to 15%. Check out WSJ article on this! General theory is that first two years Presidents spend on fulfilling difficult campaign promises as done by Obama with Health-care reform law and Trump did with tax reforms. In third year, President gets into campaign mode in first term and "Leaving Legacy" mode in 2nd term and start focusing on economy. The major policy changes in first two years start playing out in third year. In addition, based on recent history, third year also brings post mid-term political changes creating "divided government". That means President has to work with other party to run the government and hence consensus building takes center-stage. It won't feel that way given government shutdown but at least now both party leaders are talking and most likely shutdown will be over early next week. So would "third year is best" play out for 2019? Let's look at some of the factors:
- Markets have reset themselves from all-time highs of summer 2018 and are at reasonable valuation. The froth has almost gone!
- Employment is still close to all time low and labor markets are healthy
- With inflation in check, Fed can afford to wait on raising interest rates
- Economy seems to be at equilibrium with GDP growth of around 2-2.5% and inflation at 2%
- Trade discussions with China will get into high-gear in Jan and given risks to both US and Chinese economies if trade talks fail, both parties would be willing to extend hands for handshake after Chinese new year in Feb.
- Brexit deadline would be extended to give more time for reasonable deal (or no Brexit at all)
- While Apple's earning warning was bad (even though it was expected given warnings from Apple suppliers), it won't be like 2000 or 2008 when there were flood of earning warnings. We will know in next couple of weeks.
So all factors seem to indicate that "Third year is BEST" could live to its historic expectations!
/Shyam
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