May 9, 2016

The Corner of Wall Street and Pennsylvania Avenue: Tracking the Presidential Stock Cycle

The most famous Presidential Election Cycle Theory, first postulated by Yale Hirsch in the 1968 Stock Trader’s Almanac, suggests there is a prominent 48-month stock market cycle that corresponds to the four-year Presidential term.

Recently, we did our own analysis; what effect does the Presidential cycle have on stocks, and should we be paying attention?panduan android

Election cycle

(Click on picture to see larger image.)

Election Day — November 8th, 2016 — is just six months away. The next President will serve the 20th four-year Presidential term since 1937 (the year Inauguration Day was moved from March to January).

How have stocks performed in prior elections and Presidential cycles? Overlaying historical U.S. large cap stock return data on the four-year presidential cycle, we find that historically, the average one-year outlook for stocks has been the strongest near the middle of each four-year term, and weakest near the beginning and end of each term.

The chart above shows the outlook for the year ahead starting each quarter of a Presidential term, using historical averages. You can see that, historically, the outlook in the early quarters of the term has been relatively low, increasing in the middle of the term, and decreasing again toward the end of the term. One might infer that people feel greater uncertainty during an election cycle and early part of a Presidential term, then fall into a comfort zone when things become more familiar.

While this is based on a limited amount of history (not quite 20 election cycles) and subject to many exceptions, it seems to be generally consistent with the widely held notion that investment returns are often strongest during periods of relative stability and weakest during periods of uncertainty and change.