Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

2011 The Third Year of the Presidential Stock Market Cycle!

Stock-Markets / Stock Markets 2011 Dec 18, 2010 - 05:33 AM GMT

By: Sy_Harding

Stock-Markets

Best Financial Markets Analysis ArticleThe history of the Four-Year Presidential Cycle is that the stock market tends to experience its worst corrections and bear markets in one or both of the first two years of a president’s term, and then be positive for the last two years of the term.

In fact, studies have shown that if investors were to stay out of the market for the first two years of each presidential term, and then buy and hold for the last two years they would substantially outperform the market over the long-term.


So, obviously the presidential cycle has a big influence on the stock market. Administrations of both parties tend to allow corrections of excesses to take place in the first two years of their terms, and then pull out all the stops with economic stimulus to make sure the economy and stock market are recovered and looking good when re-election time rolls around. That in turn usually results in the economy being overheated, and the stock market being over-valued again, and the cycle repeats, with the next administration then allowing those excesses to be corrected in the first two years of its term.

However, as the last four years have shown, there are sometimes exceptions in the shorter term. The 2007-2009 bear market began in the third year of the Bush administration and continued down through the fourth year, and the market has been up quite strongly for the first two years of the Obama administration.

The obvious question is whether the cycle has reversed this time. If the market was up for the first two years of the term will it be down over the last two years of this cycle?

The answer is that it’s not likely.

I studied the market going back to 1915. There were seven other instances when the market was up for both the first and second year of the cycle. It did not affect the history of the last two years of the cycle usually being positive. Only once was the market then down for the third year. That was in 1923, and the Dow was down only 3.2% for the year.

However, I also went back to 1900 to check out the market’s performance in the third year of the cycle regardless of what it did in the first two years, and found that third years of presidential terms were not impressive prior to World War II.

I count five times out of the first ten presidential cycles from 1903 to 1939, or 50% of the time, that the market was down in the third year of a president’s term. Two of the declines, in 1903 and 1907 were actually bear markets, with the market being down 22.4% and 37.7% respectively in those years. It was also down 53% in 1931, the third year of Herbert Hoover’s administration (during the severe 1929-32 bear market).

But all of those negative third years were prior to World War II, not in the post-1950 modern market era.

It can be misleading to only look at the market’s year-end levels to determine risk, as doing so does not take into account the corrections that can take place within a year.

For instance in 1987, the third year of President Reagan’s second term, the market was up 2.3% for the full year. Easy enough to buy and hold through?

Definitely not. The Dow reached a new record high in August of 1987. But it then topped out into a serious bear market that culminated in the October 1987 crash. In that three-month decline the Dow lost 36% of its value, and panic prevailed. Even Wall Street conceded that the market was probably headed lower, and that the similarity to the 1929 crash might result in the economy falling off a cliff into another Great Depression. There were probably few buy and hold investors left by the time the market instead recovered to close up 2.3% for the year.

So I also checked out the intra-year corrections within other years, and nothing like 1987 occurred in the third year of other administrations. With the exception of 1987, between 1943 and 2007 the short-term corrections within a third year averaged only 8.5%, with the worst being 16.1% (in 1971).

So, although it’s not quite the sure thing Wall Street is assuring us of, it is true that at least since 1940 the third year of the presidential cycle has always been a positive year with only relatively small ‘drawdowns’ in corrections during the year, with the exception of 1987.

That does not mean they are necessarily wildly positive. Some of the third years, while positive, were only marginally so, for instance 6.1% in 1971, 4.2% in 1979, 2.3% in 1987, 6.4% in 2007.

However, based solely on the Four Year Presidential Cycle it does look like 2011 should be a low-risk year, even though the first two years of the cycle were already quite positive.

Of course there is always the possibility other factors, maybe even the current high level of investor bullishness that may have already factored a positive 2011 into stock prices, will become a larger factor than the Presidential Cycle this time around, as happened in 1987. But whoever said that investing was easy? However, it’s usually easier when the odds presented by the Four-Year Presidential Cycle are in your favor.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in