1/ Presidential Election Cycle
2/ Looking at Specifics
3/ The Theory’s Limitations
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1/ Presidential Election Cycle
We are just one year away from the next US presidential election, a cycle that many sources tell us has bearing on the market. Last year finance expert Jennifer L. Cook wrote an article explaining just what the Presidential Election Cycle means for trends. Cook tells us that, “According to this theory, U.S. stock markets perform weakest in the first year, then recover, peaking in the third year, before falling in the fourth and final year of the presidential term, after which point the cycle begins again with the next presidential election.”
2/ Looking at Specifics
The theory was originally developed by Stock Trader’s Almanac founder Yale Hirsch, and perpetualed by his son and successor Jeffrey Hirsch. In 2021 Hirsch posted some of the data for our current presidential cycle, finding it to be in line with what he expected from the modern cycle.
In an interview with The Wall Street Journal in November 2019 (one year away from the last US presidential election) Hirsch explained that “the third year—this year—of the cycle is when things are good. First years and midterm years used to be when all major wars and bear markets seemed to occur, but they have been getting stronger. But the real strength is in the third year, as we are seeing with our own eyes right now.” He then expands on the fourth-year factors, saying that “the power of incumbency is critical. You have a president campaigning from a bully pulpit, pushing to stay in office, and that tends to drive the market up.”
3/ The Theory’s Limitations
Though there is strong data to support the Hirschs’ theory, there are many factors at play that give people pause. In her article, Cook calls the theory’s predictive ability “mixed” and says, “the direction of stock prices hasn’t been consistent from one cycle to the next.” Similarly, WT Wealth Management’s Chief Investment Officer John Heilner published a paper on the matter that said, “When considering Presidential Election Cycle theory, it’s likely more accurate to say that the relationship between the President’s actions (or inaction) is coincidental when it comes to financial markets,” and warns that it may be mere correlation at play. That doesn’t negate the case for the theory however, and both Cook and Heilner make a point of admitting the consistency of third-year highs.
Heilner goes so far as to say, “a prudent investor wouldn’t bet against repeatable patterns either and should consider the Presidential Election Cycle.” Though we wouldn’t call it the be all and end all, well researched investors agree that the Presidential Election Cycle Theory is something worth taking note of.
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Originally posted 6th November 2023
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