Presidential Cycles

The four-year presidential election cycle has had an interesting influence on stock market performance. This trend is primarily driven by the uncertainty around elections and the short-term economic impact of discretionary spending and fiscal actions within the election cycle.

Jeremy Grantham, a respected financial professional, describes the tendencies of this cycle:

“All markets tend to drop in the first two years of a presidential cycle. The key for people to remember is that whoever is president has astonishingly little effect, whereas the cycle itself, the desire for the incumbent party to get re-elected, is clear in the data. The precipitating factor is economic housecleaning by officials in Washington. Presidential administrations want to correct imbalances in the economy and smarten-up balance sheets in the first two years of their term, so they will have breathing room in year three of the term to stimulate the economy and set things up for the next election. An unintended consequence is that the stock market usually falls in the first two years of the cycle.”

Looking at average market returns (based on the Dow Jones Industrial Average) and frequency of returns, the historical impact of the presidential election cycle is clear.  In pre-presidential election years, the average return was the highest, at 17.7%, and, since 1950, the Dow did not realize any losses. Additionally, in post-presidential election years, the average return was the lowest, at 4.0%, and more than 50% of the years since 1950 were loss years.  

Presidential Election Cycle
1950 – 2010
  Post-presidential election year Mid-term year Pre-presidential election year Election year
Example year 2009 2010 2011 2012
Average return 3.8% 6.7% 17.7% 4.6%
Frequency of loss 53% 38% 0% 27%
Source: Bloomberg
 

Sy Harding who has studied this cycle extensively, says:

“The driving force is the desire for each new Administration to be re-elected when the next election rolls around in four years. Therefore, it has been common since at least 1918 for the incumbent administration to do whatever it takes in the last two years of each presidential term to make sure a prosperous economy and stock market are in place when the next election arrives. Such pump-priming traditionally includes increased government-spending, cuts in interest rates and taxes, even tax rebates.”

Understanding these historical trends may be important when considering investment positioning in the future.

 

Past performance is not indicative of future results. This information is for illustrative purposes only and is not indicative of any investment or strategy result. Indices are unmanaged, and one cannot invest directly in any index. The S&P 500 is an index of 500 stocks representing major U.S. industry sectors. The Dow Jones Industrial Average is an index of 30 large U.S. company stocks.

The investment recommendations and/or assumptions made herein are not meant to be a prediction of future performance or events. Losses can occur from any investment, including those recommended by Retirement Income Solutions, and it is likely any assumption used herein will not occur as estimated. Factors such as size and performance of investment positions and accounts, length of time positions are held, the amount and timing of purchases and sales, client objectives and restrictions, tax issues, interest rates, cyclical securities price trends, news pertaining to investments and markets, changes in client plans and other factors all influence performance and assumptions materially. No investment strategy or investment plan, including a well-diversified portfolio rebalanced periodically, can guarantee a return or that losses will not occur.

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