Third presidential year a charm for stocks. (Commentary).

To gauge the prospective impact of President Bush's new economic-stimulus plan, look no further than the stock market.

If Bush's proposals to promote jobs, growth and investment don't help pull U.S. stocks out of their three-year slump, they may not accomplish much on any other front either.

Positive market reaction doesn't have to come instantly. Investors have other things to think about, such as the threat of war in Iraq, that could keep their response on hold for a while. And yes, the market is still recovering its bearings after the boom-bust cycle since the mid-1990s.

That's for the short term. Over time, the market represents a continuous public-opinion survey on economic confidence, or the lack thereof, among people who make the biggest decisions affecting money and business. Its standing as a sentiment measure is exalted by its focus on what people do with real money, rather than what they say they think.

Most moves in government economic policy have a high "psychological" component. It's hard to imagine any broad pickup in hopes and expectations not showing up in the stock market.

Psyched-up cycle

As it happens, stocks are due for a lift this year anyway, according to a widely followed indicator known as the political-stock market cycle. As students of this bit of market folklore know, the leading stock averages have gained ground in the third year of every presidential term since 1939.

"The four-year presidential election-stock market cycle is the 'Old Faithful' of indicators for us," said Jeff Hirsch, who publishes the advisory letter Stock Trader's Almanac Investor. "Most bear markets take place in the first or second years after elections. Then the market improves. Each administration usually does everything in its power to juice up the economy so that voters are in a positive mood at election time."

The cycle showed signs of fading in the 1980s and '90s. Pre-election years were generally strong, to be sure. But so was almost every other year. There was little need any more for politicos to worry about the timing of recessions and bear markets, since recessions and bear markets appeared just about obsolete.

Under the present administration, the old pattern is back with a vengeance. In 2001-02 the market suffered its worst back-to-back declines since the woes of 1973-74. Watergate, energy crisis, recession.

That bear market was followed by a gain of 31.5 percent for the Standard & Poor's 500 Index in the pre-election year of 1975. Pre-election rallies historically have produced "the greatest gains in the third years of presidents' terms with weakness in the first two years," Hirsch said.

For all his advocacy of the political cycle, Hirsch acknowledges its limitations as a basis for serious money decisions. "Yes, we are strong proponents of historical and seasonal market patterns," he said. "But we are fully aware that history never repeats exactly."

In President Ronald Reagan's second term, 1987 was the pre-election year. That was also the year of a great October crash that drove the Dow Jones industrial average down 36 percent in two months.

The market averages managed to finish '87 with small net gains. It's safe to say, though, that followers of the presidential cycle didn't find the market's behavior that year a resounding testimony to the indicator's value.

Another little misgiving about the present situation: the Bush administration has already taken one run at fiscal stimulus, in the summer of 2001, which emerged from the legislative process as a hodgepodge of short-term rebates and tax cuts spread out over a decade. It wound up hitting the economic charts not with a splash but a ripple.

This time, the economy appears to be gathering a little momentum of its own that might make it more receptive to the blandishments of policy stimulus. That's the main reason for hope that a year from now fans of the political-market cycle will be heralding another solid performance from stocks in a pre-election year.

Chet Currier is a columnist for Bloomberg News.