The relationship between the stock market’s performance and the presidential election cycle has been indisputably proven, to a degree. Not every presidential election has the same effect on the market, but certain patterns have proven to be consistent over the past two centuries or so.
Here are the details of this interesting relationship, which could help you to read the market over the next 12 months:
Incumbents do all they can to stimulate in election years
Part of the reason for the stock market cycle following the cycle between presidential elections is because sitting presidents are usually fairly intelligent men. That means that they will do all that they can to stimulate the economy in an election year and thereby increase their chances of being re-elected. Presidents have been known to speed up funding of job-producing projects and do all that they can to increase disposable income in pre-election months.
The Hard Numbers
The hard numbers are as follows: pre-election growth of the Dow Jones Industrial Average=469.5%; growth just after the election=254.5%; a year or more after the election=86.1%, and mid-term=187%. Since 1833, the pre-election and election years of the 44 administrations has produced a total net market gain of 724%, far above the 273% during the first two years of those administrations. Presidents often serve their most painful initiatives in the first halves of their terms so that they will be a distant memory when Election Day rolls around later.
Post Election Nostalgia
Post-election years can get particularly messy once the music dies down at the Inaugural Ball. World Wars I and II started in post-election years, as did Vietnam and four bear markets (1929, 1937, 1969, 1973). Throw in 9/11, the dip of 2001, and the Dow’s low in 2009, and the theory of a miserable post-election syndrome gains a lot of traction.
Mid-Term Election Years
In the mid-term election years, presidents have to work with a new Congress and no one really knows who will emerge as a winner after the dust settles. As a result, the stock market generally retreats during these years; almost all bear markets began and ended in the two years after presidential elections. That bottoming out created great opportunities for …
The Third Year of the Cycle
People who invested during the third year of a presidential term have not had a single down year in terms of the Dow’s performance since 1939. Presidents get busy to make voters happy and their wallets fatter in the year before they cast their votes again.
From The Stock Traders Almanac…..
From April 1942 to October 2002, for instance, 15 discernible stock market cycles have occurred, and each averaged just about four years. That’s not an accident. As Yale Hirsch of The Stock Trader’s Almanac has noted, “Presidential elections every four years have a profound impact on the economy and the stock market. Wars, recessions and bear markets tend to start or occur in the first half of the term and bull markets, the latter half.”
The Chicken or the Egg…
Given the evidence above, one can ask which came first, the chicken or the egg. Do investors anticipate this cycle or do they react to changes instigated by politicians and presidential administration officials? Another valid question is: do the measures taken by presidents seeking re-election create the inevitable inflation that has to be curbed, resulting in the four-year cycles?
Models that simulate what would have happened to investors that bought at different times during the election year cycle are astounding. Investors who would have purchased stock on October 1st of the second year of a presidential term and sold on December 31 of year four would have made $72,000+ on a $1,000 investment from 1952-2000. An investor who bought on the first day of a new president’s term, on the other hand, and sold on September 30 of year two (to investor #1 in this example?) would have ended up with $643 after starting with $1,000 in 1952. In short, investor #1 would have missed almost all of the down markets over the past 60 years, while investor #2 would have been crushed by the waves of the presidential election cycle. Let’s re-state that: investor #1 would have made money in every single 27-month period before a U.S. presidential election over the past half-century! Conversely, investor #2 would have lost money in six of the 13 periods during which he put his money into play early in a presidential term.