In the United States, a presidential election comes around every four years. Inevitably, investors begin to wonder what, if anything, they should be doing differently since it is an election year. There has already been plenty of behavioral finance research done on the subject, so let’s start there.
The Presidential Cycle
One of the best examples of stock market cycles is the effect the four-year presidential election has on the stock, bond, real estate, and commodities markets. As a matter of fact, since 1928, the stock market has risen (usually by a considerable margin) almost every election year save 1940, 2000, and 2008. If we take a moment to think about it, the trend seems to make sense. Politicians, especially incumbents, understand that voter approval is largely based on the state of the economy. Therefore, as an election draws near, administrations tend to do everything they can (changes in spending patterns, tax cuts, etc.) to stimulate the economy, so people go to the polls with jobs, some savings (hopefully), and an overall feeling of economic well being. Couple this with the euphoria created by campaign promises, and it becomes pretty easy to see why the trend has developed.
Post-election periods seem to have suffered from the exact opposite effect, and the two years after an election tend to be investor unfriendly. Again, when looking from a macroeconomic standpoint, common sense seems to back up the data. Presidential administrations tend to do much of the heavy lifting in the early stages of a president’s term. Consequently, most wars, recessions, and bear markets start in the first half of the four-year presidential cycle.
Marshall D. Nickels, EdD, a faculty member at Pepperdine University, expanded upon the data in a very well thought out paper called “Presidential Elections and Stock Market Cycles”, and his research served as the basis for the first part of this article. The data he collected point to “a four-year stock market cycle [that] seems to have become a part of the investment landscape since the mid-twentieth century”. In fact, between 1942 and 2002, there were 15 stock market cycles that lasted about four years each.
What’s his conclusion? Well, the data show that investing in the 27 months leading up to presidential election is far more profitable than investing during the 21 months following an election. But, before everyone goes tailoring their investment strategies to fall in line with Dr. Nickels’ research, we would like to point out that there are numerous cycles and patterns that have developed over the years that behavioral finance researchers have pointed out. For instance, did you know that during the entire 20th century, every year that ended in a five (1905, 1915, etc.) was profitable? Why not try the “Super Bowl Stock Market Predictor”? It says that if the team that wins the Super Bowl has its roots in the original National Football League, the market will rise; but if the winning team was from the American Football League, the market will decline. No, we are not making that up.
In sum, the patterns discovered, no matter how obvious or strange, are only useful if they continue. The presidential election-stock market cycle pattern did not come true in 2008. In fact, the S&P 500 dropped 37% that year. This investment strategy didn’t hold up in 2000 either, as the S&P 500 fell 9%. So, we think most investors should continue investing the boring way, which involves examining risk-reward profiles, diversifying holdings, and thinking about the long-term—not the next president. That strategy has proven itself time and time again, regardless of who wins the election.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
