July 27th, 2016 by Duarte Dispatch
To be honest, I typically avoid this question. This Presidential Election Cycle Theory was popularized by Yale Hirsch in his 2004 “The Stock Trader’s Almanac.”
Yes, in his study there does appear to be a strong correlation between the rise and fall of the S&P 500 Index and the four-year interval between presidential elections.
Charts that take an historical look at stock market cycles from 1942 to 2002* show an interesting pattern: The S&P 500 usually shows gains leading up to a presidential election. In the two years following the election, the S&P most often declines – bottoming out around the mid-term elections – and then starts its gradual rise towards the next election year.
Now, the S&P 500 is an unmanaged index of stocks that cannot be directly invested in, so don’t bet the farm quite yet. Especially as there have been a handful of notable exceptions. Most recently, the dramatic stock market fall in the last few months of George W. Bush’s presidency. 2008 was indeed a bitter pill. But, focusing on that unfortunate event takes away much of the fun – and fun is, frankly, the only legitimate use for this Presidential Election Cycle Theory. Sorry Mr. Hirsch.
The numbers are real and the correlation is relatively easy to see. However, correlation is not the same thing as causation. This is the important take-away. A statistical relationship between facts or figures does not necessarily mean that one change in behavior is the cause of another. For example: Father’s Day is always in July, which is typically the hottest month of the year. But Father’s Day does not radiate all that heat – the sun does (if you’ll pardon the pun).
In the past nine elections, when the Gross Domestic Product improved during an election year compared to the year before, the incumbent party in power won the presidency**. Except when it didn’t – George H. W. Bush’s term ended with strong GDP growth, but he still lost the election.
As a professional in the finance industry, I am fond of statistics and their patterns. Sometimes they’re reminiscent of constellations in the sky. They’re helpful and splendid celestial markers. However, once astronomy gives way to astrology, reason becomes rhyme.
Perhaps administrations exercise fiscal policy in a way designed to pump up the economy just before a presidential election to gain voter approval. Such pre-election actions, like campaign promises, could create a bit of euphoria among voters and investors alike.
Past performance is not indicative of future returns Opinions voiced are for general purposes only, aren’t intended to provide specific advice or recommendations for any individual and don’t constitute an endorsement by NPC. Securities and Advisory Services offered through National Planning Corp. (NPC), member FINRA/SIPC, a Registered Investment Advisor. EH Financial Group, Inc. and NPC are separate and unrelated companies.