- Some historians and economists believe market performance generally correlates with the four-year U.S. presidential election cycle.
- While there is some connection, we do not believe it’s enough on which to base a sound investment strategy.
- Although the relationship between politics and markets is interesting, investors should focus on long-term goals.
A four-year cycle (and sometimes, eight)
Economists and historians alike have attempted to answer this since the mid-twentieth century, leading to the development of the Presidential Election Cycle Theory in the late 1960s. According to historian Yale Hirsch, founder of the Stock Trader’s Almanac, U.S. stock market performance follows a predictable four-year pattern that correlates with the American presidential cycle.1
Until the twenty-first century, this theory held mostly true. However, the S&P 500 Index skyrocketed during the first year of the George W. Bush, Obama and Trump presidencies.
First is (historically) the worst
Until the first year of George W. Bush’s first term, investors tended to earn the smallest amount of stock market gains in the year immediately following a presidential election.
Yes, there is often a honeymoon period of optimism among Americans about new leadership that boosts the market. But policymakers under a new presidency may also begin to feel less restrained about introducing programs — some of which could be unpopular or restrictive — such as a tax hike or increased government spending. This may negatively impact business profits and consumers, causing the market to slump.
Second is better, third is best
During Year Two of a presidency, the economy has tended to level out. Year Three of a president’s term has generally been the best, performance-wise, for the U.S. stock market. Researchers believe this is because the incumbent, thinking ahead to re-election, often introduces measures designed to stimulate the economy — to which the market responds favorably. Since 1928, the third year following a election year has been positive for U.S. stocks about 82% of the time.2
Fourth is fine…eighth, not so much
Market performance diverges in the fourth year of a presidential term. Incumbents are often re-elected, which creates less panic in the market compared to Year Eight of a two-term presidency, when markets tend to fall as investors despise uncertainty. Data from S&P Global Market Intelligence show that since 1944, the S&P 500 Index has only risen 50% of time during the final year of a two-term presidency.3
More compelling may be the market’s influence on the outcome of an election. According to Presidential Election Cycle Theory, the incumbent president has won 87% of the time (and every election since 1984) when the S&P 500 Index has advanced between July 31 and October 31 leading up to Election Day. Conversely, when the Index declined during the same period, the challenger unseated the incumbent.
Congress has the most clout
No matter who claims victory in the presidential election, their influence on the stock market is generally limited. The lawmakers in Congress have more direct impact on stock-market performance.
According to Ned Davis Research, a split Congress has the biggest negative influence on U.S. stocks, owing perhaps to term-length differences between the House and the Senate.4 House representatives are re-elected every two years, while senators are re-elected every six. If one political party’s approval rating drops amid economic policy missteps, it does not necessarily mean that it will lose both the House and the Senate simultaneously.
Don’t be bullied by the cycle
It’s easy to get caught up in every little market move. But for long-term investors, a four-year cycle — volatile or otherwise — should not have a lasting effect.
Theories about how the presidential cycle affects the stock market are just that — best educated guesses. Even academicians and economists don’t always get it right. No matter what phase of the presidential cycle we happen to be in — or which candidate wins the election — stay focused on long-term goals and resist the urge to react.
4 Clissord, E. & Nguyen, T. (July 14, 2020). 2020 Election Handbook. Ned Davis Research. Issue SP20200714.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. There are risks involved with investing, including loss of principal.
Information provided by SEI Investments Management Corporation (SIMC), a wholly owned subsidiary of SEI Investments Company (SEI).
Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.