Now that both major parties have wrapped up their conventions and we enter the home stretch of the presidential election race, you may start to see suggestions about how the presidential election cycle affects the markets. Some will say the months leading up to the election is a good time for markets and other folks will say the opposite! So, is there anything we can learn from this cycle that can help with investment decision making?
First is the worst; Third is the best?
According to the Presidential Election Cycle Theory, which was developed by a long running book and newsletter series called the “Stock Trader’s Almanac”, there is discernable pattern to market trends in relation to presidential terms*. The theory suggests that the best year for markets is the president’s third year in office, while the first year is the worst.
The founder, Yale Hirsch, believed that the first 2 years of a president’s term are spent working on policy priorities and promises outlined in their campaign, and then in their third year, their attention turns to helping the economy in order to help boost their re-election efforts. It doesn’t matter which party is in the White House, it seems to work regardless of party affiliation. While there is a discernable pattern here, remember that this is but one factor and other economic and social factors will also have a bearing on returns.
According to a study done by Lee Bohl in 2016**, analyzing data from 1933 and 2015, the average returns per year for the S&P500, are as follows:
- First year after election: +6.7%
- Second year: +5.8%
- Third year: +16.3%
- Fourth year: +6.7%
What does it all mean?
It’s important to remember that these are averages. To drill down further, we look at how often the markets go up. During this period, the stock market was up about 70% of calendar years, but in the third year of the cycle, the S&P 500 was up 91% of the time. Year 1 post election had gains 48% of the time, year 2, 62% up years, and in the election year, 70% of the years were up**.
So, outside of the third-year pattern, it’s hard to use this theory as the primary metric for making investment decisions without looking at other factors. Things like interest rates, inflation, recession, war, domestic violence, unemployment, etc. should all be considered in both your long-term and short-term investment strategies. The primary reason is there have only been 23 presidential elections during the period between 1933 and 2015, so the data set is relatively small. As with most systems for investing, I have yet to find one that is 100% correct. These historical observations can give us a clue and are worth noting, but true success in personal finance is built on knowing what you are trying to achieve, what is your comfort zone and how much time do you want to commit to managing and updating your investments.
Here’s to you building your Happy Retirement!!
*Investopedia, updated, July 5, 2024 “Presidential Election Cycle Theory: Meaning, Overview, and Examples” Jennifer Cook
**Trade2Win. “Presidents, Politics, and the U.S. Stock Market