The Presidential Election Cycle (Theory)
So the Presidential Election has been run and done in the U.S with Obama being returned. As I was watching these events unfold I began considering what impact this might have on the stock market so I plugged the query into the good old Google machine which produced some interesting results. One of the higher ranked results was from Patrick Catinia on stock market cycles and included this chart going way back.
| Stock Market Returns During Election Years (based on S&P 500) |
||
| Year | Return | Candidates |
| 1928 | 43.6% |
Hoover vs. Smith |
| 1932 | 8.2% | Roosevelt vs. Hoover |
| 1936 | 33.9% | Roosevelt vs. Landon |
| 1940 | -9.8% | Roosevelt vs. Willkie |
| 1944 | 19.7% | Roosevelt vs. Dewey |
| 1948 | 5.5% | Truman vs. Dewey |
| 1952 | 18.3% | Eisenhower vs. Stevenson |
| 1956 | 6.5% | Eisenhower vs. Stevenson |
| 1960 | .50% | Kennedy vs. Nixon |
| 1964 | 16.5% | Johnson vs. Goldwater |
| 1968 | 11.1% | Nixon vs. Humphrey |
| 1972 | 19.0% | Nixon vs. McGovern |
| 1976 | 23.8% | Carter vs. Ford |
| 1980 | 32.4% | Reagan vs. Carter |
| 1984 | 6.3% | Reagan vs. Mondale |
| 1988 | 16.8% | Bush vs. Dukakis |
| 1992 | 7.7% | Clinton vs. Bush |
| 1996 | 23.1% | Clinton vs. Dole |
| 2000 | -9.1% | Bush vs. Gore |
| 2004 | 10.9% | Bush vs. Kerry |
| 2008 | -37% | Obama vs. McCain |
| 2012 | ? | Obama vs. Romney |
The actual returns are looking like a positive year to fill in the 2012 box with the S&P500 current up 12.72% since January 1st. He also points our a strategy that you could apply, and an even greater point about it at the end which I will quote verbatim
One strategy stands out as having been overwhelmingly successful has been to hold stocks only in the last half of the third year into the first half of the fourth year of any presidential term. I cannot confirm that anyone has used this strategy, however on paper it has yielded tremendous returns, and insured that investors were “out of the market” during the majority of losing years. The problem is that very few have the discipline or the wherewithal to pursue such a strategy. Brokerage firms certainly would not condone this approach as they would be without commissions for 3 years out of 4!
Digging a bit deeper revealed an actual theory called the Presidential Election Cycle (Theory) which was developed by Yale Hirsch and contends that U.S. stock markets are weakest in the year following the election of a new U.S. president (supporting somewhat the strategy above). According to this theory, after the first year, the market improves until the cycle begins again with the next presidential election. Unfortunately, Investopedia noted that this theory was subsequently disproved in later years of the 20th century with markets up 25.2% in George H.W. Bush’s first year, and the start of both of Bill Clinton’s terms showed strong market performance.