SAN FRANCISCO, November 03, (THEWILL) – Stockbrokers and traders are getting set to see a fulfillment or otherwise of the U.S Presidential Election Cycle Theory as voting commences in America.
The U.S Presidential Election Cycle Theory, developed by Stock Trader’s Almanac founder, Yale Hirsch, contends that U.S. stock markets are weakest in the year following the election of a new president.
According to this theory, after the first year, the market improves, peaking in the third year. Market returns then fall in the fourth year of the presidential term, after which point the cycle begins again with the next presidential election.
The theory suggests that markets perform best in the second half of a presidential term, when the sitting president tries to boost the economy to get re-elected and predicated on the view that a shift in presidential priorities is a primary influence on the stock market.
Hirsch’s aphorisms also included the belief that the four-year presidential election cycle was a key indicator of stock market performance. Using data going back several decades, the Wall Street historian posited that the first year or two of a presidential term coincided with the weakest stock performance. According to Hirsch’s philosophy, after entering the Oval Office, the chief executive has a tendency to work on their most deeply held policy proposals and indulge the special interests who have gotten them elected.
As the next election looms, however, the model suggests that presidents focus on shoring up the economy in order to get re-elected. As a result, the major stock market indices are more likely to gain in value. According to the theory, the results are fairly consistent, regardless of the president’s political leanings.
Data over the past several decades suggest that there may in fact be a tendency for share prices to increase as the leader of the executive branch gets closer to another election.
In 2016, Charles Schwab analyzed market data going back to 1950 and found that, in general, the third year of the presidency overlapped with the strongest market gains. The S&P 500, a fairly broad index of stocks, exhibited the following average returns in each year of the presidential cycle:
Year after the election: +6.5%
Second year: +7.0%
Third year: +16.4%
Fourth year: +6.6%
Investopedia reports that Donald Trump’s tenure has been a notable exception to the first-year stock slump that the theory predicts. The Republican actively pursued an individual and business income tax break that was passed in late 2017, fueling a rally that saw the S&P 500 rise 19.4%. His second year in office saw the index take a 6.2% dive.
But once again, the third year marked an especially strong time for equities, as the S&P surged 28.9%.4 5
Over the past 60-plus years, the third year of the presidency saw an average stock market gain of more than 16%. But the limited number of election cycles makes it difficult to draw reliable conclusions about the theory.
Overall, the predictive power of the presidential election cycle theory has been mixed. While average market returns in years one and two have been slightly sluggish overall, as Hirsch suggested, the direction of stock prices hasn’t been consistent from one cycle to the next.
The bullish trend in year three has proven more reliable, with average gains far exceeding those of other years. What’s more, roughly 90% of all cycles since 1950 experienced a market gain in the year after the mid-term elections.
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