Presidential Cycle

Presidential Cycle

As we discussed in the marketing timing strategies, we will spend more time to dig deeper into the Presidential Cycle.

The first year is the weakest of all four years. Higher returns during the last two years of a Presidential term than the first years. The expectation is that as a President takes office he begins to implement his proposals and investors, hunker down waiting to see the results. During the final two years the President becomes more concerned with his re-election and will ‘prime the pump’ in order to secure re-election.

For generations, researchers have sought to make sense of the aggregated behavior. Is there any rhyme or reason behind anything that occurs in the markets or in life? The four-year U.S. presidential cycle is attributed to politics and its impact on America’s economic policies and market sentiment. Either or both of these factors could be the cause for the stock market’s statistically improved performance during most of the third and fourth years of a president’s four year term. The month-end seasonality cycle is attributed to the automatic purchases associated with retirement accounts.

Mark Hulbert of MarketWatch compiled Dow Jones data dating back to 1896 and found the following:

– the third year of a presidential cycle significantly outperforms all others, with average stock market gains of 15.5% compared to 8.8% in the first year, 0.4% in the second, and 4.1% in the fourth year.

– the market performance in the third year of a presidential cycle is not statistically correlated to the market performance of the previous year; in other words, third years have tended to outperform other years regardless of whether the second year in the cycle experienced a boom or a bust

– he also found that there is no significant correlation between stock valuations and market performances in the third year; “On average, third years perform just as well when price/earnings ratios are high as they do when those ratios are low”

Marshall Nickles of Pepperdine University found similar results in his 2004 study.

– historical stock market cycles dating back to 1942 have lasted an average of 4.02 years, which is essentially the same length as a presidential term; a cycle is defined as the time between peaks or the time it takes to go from a peak to a trough and then back to a peak

– stock markets bottomed out only once during the third year of a presidential cycle in data dating back to the FDR administration. The one time the trough occurred in the third year was in December 1987 (Reagan). The average time frame for a market trough was 1.87 years into the presidential term. Markets never bottomed out in the fourth year.

In general, incumbent politicians are more likely to be re-elected and their party remains in power if the economy has been doing well. Basically, satisfied voters have tended to re-elect incumbents. Politicians have tended to fiscal policy to buoy the economy during the campaign season.