It’s Beginning to Look A Lot Like…1971 [updated]

The Global Macro Monitor posted several pieces earlier in the year about the Presidential Stock Cycle.  See here, here, and here.   The third year of a first term President is the strongest year in the cycle.  The table illustrates that if the S&P500 doesn’t close at 1257.64 (closed Friday at 1244.28) or higher,  President Obama will be the first post-war “Investor in Chief” to  have a S&P500  down year in the third year of his first term.

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It’s also beginning to feel a lot like 1971.   We had thought earlier in the year the market would trade more like 1991, also a year of macro swans, including a major credit crunch and the first gulf war.   After trading up early that year, the market moved in a relatively tight range and ramped hard at the end of the year, 10.5 percent in last 14 trading days.  We also thought the volatility band would expand this year, but not as much as it has.

Bespoke had a great piece out last week showing that since August 1st the S&P500 has had eight declines of 5 percent or more and eight advances of 5 percent or more.  Contrast that to several stretches in the 1990′s where the S&P500 went more than a year without a rally or decline of 5 percent.

The S&P500 now appears to be tracking the 1971 analog, also the third year of a first term President.  Ironically, 1971 was a year of similar currency turmoil as President Nixon officially ended the gold standard and the Breton Woods international monetary system in the middle of August.   The IMF was also at the center of the global volatility.

During the massive run on gold, then Treasury Secretary John Connally and Under Secretary for Monetary Affairs Paul Volcker advised President Nixon to let the dollar float, effectively rendering the greenback a full blown fiat currency.  This caused panic in the global markets until other countries let their currencies go.

History is rhyming now with the current Euro and sovereign debt crisis.

Let’s also hope Santa brings us a similar December ramp in the S&P500 as he did in 1971 and 1991.   The results of the EU summit at the end of the week and the stability of money demand in the Euro core if the ECB chooses to monetize will, in our opinion,  largely determine if Santa Claus or the Grinch shows up this December.   We’ll worry about 1972 2012 when we get there.

This is our best guess, which often diverges from reality as it unfolds.    And that, folks, partially explains why markets are so volatile as they move from perception to reality and back to perception.

Stay tuned.