The Presidential Election Cycle Theory is Just Another Guess

The Presidential Election Cycle Theory states the stock market is weakest in year one of a presidential term and then improves. Is it a theory you can rely on?

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Is it here already? Every time I turn on the TV, the news is focused on presidential candidates and the upcoming primaries. With that in mind, I thought it might be a great time to look at one of the more popular stock market theories called The Presidential Election Cycle Theory.

What is The Presidential Election Cycle Theory?

The Presidential Election Cycle Theory was developed by Yale Hirsch who wrote The Stock Trader’s Almanac published in 1968. The theory states that U.S. stock markets are weakest in the year following the election of a new U.S. president, and then improve over the remaining three years.

The basis of this assumption is that in years one and two of a term, the president is working to fulfill campaign promises and political favors. Once that is complete, the president moves on to the policies aimed at improving the economy, from which the stock market and its investors reap more benefit. The theory indicates that the best year for stock market performance is in the third year of a presidential cycle, followed by the fourth year, second year, and finally the first year.

We are currently in year three of a presidential cycle. If this theory holds true, 2019 should be the best of the cycle. Unfortunately (or fortunately for those who do not get caught up in theories about market timing), year one in this cycle has not held true to the theory. 2017 was good with the S&P climbing over 21%!

And in year two, 2018, the stock market experienced a painful decline of over 4%. That’s not consistent with the theory.

So far in 2019, the S&P is up about 20%. It has three months remaining in the cycle. Out of curiosity and financial nerdiness, I will watch and wait to see how this plays out.

The Truth About the Election Cycle Theory

The bottom line about The Presidential Election Cycle Theory is that it is accurate in some years, and inaccurate in others. What we can be certain of is that it is a theory created in an effort to combat market uncertainty and utilize a presidential term as a market timing tool. It should not be counted on. What can be counted on is a consistent, disciplined approach to investing whether the market is up or down, whether we are in year one, two, three or four, and no matter what political party occupies the White House. A disciplined approach takes advantage of rebalancing during times of volatility, which could be considered a fancy way of saying “buying low and selling high.”

Or, as Warren Buffet puts it, “Be greedy when others are fearful, and fearful when others are greedy”. Perhaps we should toss The Stock Trader’s Almanac and instead, just create a one-page leaflet with this quote for investors. At Rodgers & Associates, part of our job as advisers is to teach our clients to block out the noise and use discipline. We try to maximize what the market gives us instead of guessing or basing our behavior on theories that aren’t proven or reliable.

At Rodgers & Associates, part of our job as advisers is to teach our clients to block out the noise and use discipline. We try to maximize what the market gives us instead of guessing or basing our behavior on theories that aren’t proven or reliable.

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