Presidential Election Cycle Theory

Investopedia

What is ‘Presidential Election Cycle Theory’

The Presidential Election Cycle Theory is a theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a new U.S. president. According to this theory, after the first year, the market improves until the cycle begins again with the next presidential election.

BREAKING DOWN ‘Presidential Election Cycle Theory’

While the Presidential Election Cycle Theory played out relatively reliably in the early to mid-1900s, data from the later 20th century has proven it false.

In 1937, Franklin D. Roosevelt’s first year, the market was down by 27.3 percent. The Truman and Eisenhower eras also started off with a down year in the stock market. The start of more recent presidencies, however, did not show the same pattern. For example, stock market performance in the first two years of Barack Obama’s first presidential term was much stronger than his third year. And the same results occurred in Obama’s second term, the first two years were much stronger than the third and fourth. Also, in George H.W. Bush’s first year, the market was up 25.2 percent, and the start of both of Bill Clinton’s terms showed strong market performance, up by 19.9 percent and 35.9 percent.

This evidence reinforces the idea that no market timing strategy is ever reliable enough to remove market risk completely. Market risk primarily comes from the random and unforeseeable nature of economic and market conditions. The truth seems to be that much of the relationship between the President’s actions (or inaction) is coincidental when it comes to markets.

Primary Tenets of the Presidential Election Cycle Theory

  • In years one and two of a presidential term, the President exits campaign mode and works hard to fulfill campaign promises before the next election begins. It is theorized that because of these circumstances surrounding the President’s work, the first year after their election is the weakest of the presidential term, with the second year being not much better.
  • This trend of initial economic weakness was thought to be true because campaign promises in the first half of the presidency are not typically aimed at strengthening the economy. Instead, political interests, such as tax law changes and social welfare issues tend to be highest priority.
  • In years three and four of a Presidential term, it is thought that the President goes back into campaign mode and works hard to strengthen the economy in an effort to earn votes with economic stimulus, such as tax cuts and job creation. As such, the third year had often been the strongest of the four-year term and the fourth year, the second-strongest year of the term.

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