Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 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