The Presidential Election Cycle (Theory) - The Hyperion Effect

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.

So once again, we discover that there is no silver bullet to long term investing. For those of you in Australia, maybe try a ticket in tonight’s Powerball which might prove a better theory than this one!.

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