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For the past several decades, individuals in all walks of life have observed the cyclical nature of the stock market. Pundits
have attempted to correlate these cycles with everything from referencing the position of the moon and stars to using highly
sophisticated econometric models. This article, however, attempts to address the timely relationship between politics and
stock market behavior.
During the first half of the twentieth century, economic theory was limited primarily to the micro study of supply and demand
theory. Minimal concern was given to the macro economic environment. However, after World War II, the work of John
Maynard Keynes, an English economist, began to dominate Western economic thinking with a broad macro view of
economics. First presented in 1936 by Keynes, this approach was the beginning of macro economic theory. It called for
governments to prescribe specific macro economic policies in an effort to ameliorate business cycles. By the late 1950s,
Keynesian theory was widely accepted in academic circles and was being taught at most major U.S. universities.[1] The
federal government began to embrace Keynesian economics by the early 1960s, and from that time forward, Washington
has played an active role in influencing the direction of the economy.
Table 1
Historical Stock Market Cycles for the S&P 500 Index
(1942 2002)
Dates of
Peaks/
S&P
Length of
Bull
Length of
Bear
Full
Peaks &
Troughs
Price
Bull Market
Market
Bear Market
Market
Cycle in
(years)
Rise (%)
(years)
4.08
158%
.36
-27%
4.45
.99
-21
2.68
.69
-15%
4.25
1.22
-22%
4.10
.54
-28%
4.68
.66
-22%
4.28
1.49
-36%
3.63
1.72
-48%
4.36
1.45
-19%
3.42
1.70
-27%
4.44
.28
-34%
5.31
.24
-20%
2.85
.17
-9
3.48
.08
-19%
4.30
2.5
-26%
4.02
0.94 yrs
-26.4%
4.02
Troughs
4/42
Trough
7.47
5/46
Peak
19.25
10/46
Trough
14.12
6/48
Peak
17.06
6/49
Trough
13.55
1/53
Peak
26.66
9/53
Trough
22.71
8/56
Peak
49.74
10/57
Trough
38.98
12/61
Peak
72.64
6/62
Trough
52.32
2/66
Peak
94.06
10/66
Trough
73.20
11/68
Peak
108.37
5/70
Trough
69.29
1/73
Peak
120.24
10/74
Trough
62.28
9/76
Peak
107.83
3/78
Trough
86.90
11/80
Peak
140.52
8/82
Trough
102.42
8/87
Peak
336.77
12/87
Trough
223.93
7/90
Peak
368.95
10/90
Trough
295.46
2/94
Peak
482.00
4/94
Trough
438.92
7/98
Peak
1186.74 4.25
8/98
Trough
957.28
3/00
Peak
1527.45 1.58
10/02
Trough
776.75
Averages
1.68
3.56
2.88
4.14
3.62
2.15
2.63
1.97
2.73
5.03
2.61
20%
97%
119%
86%
80%
48%
74%
73%
62%
229%
65%
3.31
3.08 yrs
170%
60%
93%
As we can see from Table 1, full cycles occur approximately every four years. During this period, bull markets averaged
about three years, while bear markets averaged less than a year. A more detailed investigation that includes presidential
election cycles for the period from 1941 through 2000 reveals some interesting findings. Stock market lows have occurred
surprisingly close to mid-year congressional elections, or approximately two years before presidential elections. (See Table
2.)
Table 2
Presidential Elections and Market Troughs
Presidential Term
Year During
of Market Bottom
Presidential Term
When Market Bottomed
1942 1944
4/42
2nd Year
1945 1948
10/46
2nd Year
1949 1952
6/49
1st Year
1953 1956
9/53
1st Year
1957 1960
10/57
1st Year
1961 1964
6/62
2nd Year
1965 1968
10/66
2nd Year
1969 1972
5/70
2nd Year
1973 1976
10/74
2nd Year
1977 1980
3/78
2nd Year
1981 1984
8/82
2nd Year
1985 1988
12/87
3rd Year
1989 1992
10/90
2nd Year
1993 1996
4/94
2nd Year
1997 2000
8/98
2nd Year
2001 2004
10/02
2nd Year
Average = 1.87 years into presidential term
Table 2 clearly shows a clustering of bear market lows around the congressional election period, or about two years into the
presidential term. As can be seen, three of the 16 bear market lows occurred in year one of the presidential term, 12 in year
two, one in year three, and none in year four (the election year).
The Test
Based on discussions above and the notion that the S&P 500 Index seems to bottom approximately two years into
presidential terms (Table 2), we can construct a hypothetical test for two investors that calculates the dollar return for two
simple alternative investment strategies. In neither case is allowance given for possible dividends or interest earned. In
addition, commissions and taxes are ignored for the purpose of simplicity. Prior to the 1952 presidential election, the U.S.
government generally did not attempt to influence the economy in any significant way, so the period before 1952 (except for
the World War II period) is not useful for testing this strategy. Therefore, the test begins with the 1952 election period.
Imagine that the first investor had consistently purchased the S&P 500 Index 27 months before presidential elections and
had sold near election time on December 31 of the election year. Because a 27-month period seems to provide better
returns than other studied periods before the election, a 27-month period was selected for this test. This strategy kept
Investor 1 out of the market from January 1 of the inaugural year through September 30 of the second year during the test
period. On the other hand, imagine further that Investor 2 bought the S&P 500 on the first trading day of the inaugural year
of each presidential election during the test period and liquidated the portfolio on September 30 of the second year of the
presidential term. Would either or both of these simple procedures have consistently made money for the investors? Table 3
below reveals the results on both a percentage change basis and dollar return.
Table 3
Percentage and Dollar Returns of Two Investment Strategies
(Dollars Amounts are Cumulative)
Starting Value for Investors 1 and 2 = $1,000
Presidential
Investor 1
Investor 2
Election
Oct 1 of 2nd yr of
Jan. 1 of inaugural yr
dollar results
dollar results
Dates
Presidential term
through Sept. 30 of
(beginning
(beginning
through Dec. 31 of
second yr of
with $1,000)
with $1,000)
presidential term
strategy)
(Investor 2 strategy)
1952
+35%
+22%
$1,350
$1,220
1956
+45%
+8%
$1,956
$1,318
1960
+16%
-2%
$2,271
$1,291
1964
+52%
-9%
$3,451
$1,175
1968
+39%
-19%
$4,798
$952
1972
+40%
-47%
$6,717
$505
1976
+70%
-4%
$11,418
$483
1980
+32%
-12%
$15,072
$425
1984
+37%
+40%
$20,649
$595
1988
+19%
+11%
$24,571
$660
1992
+38%
+7%
$33,909
$707
1996
+60%
+42%
$54,254
$1,004
2000
+34%
-36%
$72,701
$643
The findings in Table 3 are extremely interesting. The first investor put up money 13 times and did not lose money in any
period. Gains ranged from a high of 70 percent prior to the 1976 election to a low of 16 percent before the 1960 election.
Investor 1 saw the original investment of $1,000 grow to $72,701. This is a percentage gain of 7,170 percent. Investor 2 was
not so fortunate. This individual also anted up 13 times, but lost six times. The largest loss of -36 percent was seen after the
presidential election of 2000. Investor 2 saw the original $1,000 shrink to only $643, or a loss of -36 percent, in nearly five
decades. That percentage is based on nominal dollars and does not include the impact of inflation.
Graphing the percentage gain and loss makes the difference quite obvious.
However, when you look at a graph of the cumulative dollar difference between the two strategies, the difference is even
more dramatic!
Final Thoughts
It is not the intent of this paper to forecast the stock market. Even where patterns exist, there is enough variability that it is
risky to try to anticipate specific turns in the market. Yet we have identified a potentially profitable four-year stock market
cycle that has worked well over the better part of the last century. Investing for the 27 months before a U.S. presidential
election certainly seems to be more profitable than investing during the 21 months after the elections.
However, just when you think that you have figured it all out, you find another pattern that can suggest different possibilities.
For instance, another analysis shows a highly intriguing re-occurrence in the stock market index. During the entire twentieth
century, every mid-decade year that ended in a 5 (1905, 1915, 1925, etc.) was profitable! This is not to say that all of these
years had uninterrupted ascending trends, but by years end there had been impressive gains. Whether that pattern was a
fluke or will continue in the 21st century is anyones guess. And, 2005 is also an inaugural year.
However, trying to figure out such patterns can certainly make life interesting.
[1] John Maynard Keynes, General Theory of Employment, Interest and Money, 1936. Republished by Harcourt, Inc. (1964).
A further discussion of Keynesian economics can be found in most college level textbooks on economics. There are also
websites devoted to his work, e.g.,http://cepa.newschool.edu/het/essays/keynes/keynescont.htm or http://www-gap.dcs.stand.ac.uk/~history/Mathematicians/Keynes.html
[2] Yale Hirsch and Jeffrey Hirsch, The Stock Traders Almanac 2004, Hoboken, NJ: John Wiley and Sons, (2004): 127.
Comments
Peter Duffy
December 16, 2011 at 7:48 am
Arlene C
February 25, 2012 at 10:56 am
Excellent article. It is good to read an article that explains everything clearly and contains everything you wanted to know in
simple words and charts. Very interesting, I really enjoyed it.Thank You Marshall Nickles, EdD
Idan
April 9, 2012 at 12:31 am
Yap
April 18, 2012 at 6:44 pm
Hi, great article, however, I tried briefly to verify table 2, and found myself disagreeing that 1994 and 1998 were troughs as
indicated by the table. 1998 for example, S&P prices were much higher than 1996, so post-1996 elections, there was no
slump in market. The same goes for the 1992 elections.
Obama
June 21, 2012 at 3:52 pm
As another poster commented, 2008 was an election year but a big down year and certainly a bear market. For that cycle
you would have been far better off buying in October of 2009.
We have had corrections every year since 2008. This is an election year, but the 2008 election year failed us. However the
system would have indicated a buy in October of 2010, in the high 1100 range. At a conservative 20%, that would set the
election year finish to the low to mid 1300s. We are currently right at that point after todays big drawdown.
So the question is whether we get a 2008 style collapse or if the regular pattern continues. Aside from election years, year
end rallies usually happen, so even with a drop and a short term bear market, we could still finish up to the projected trend
target on the low end. If we are indeed in a bear market, it was probably signaled in April, which would set October as a
possible trough.
Jack
July 25, 2012 at 7:13 am
Thanks for artcle. What happened to investor 3 that dollar cost averaged the entire period? In the middle, a little under, or
over?
Benn
August 26, 2012 at 4:57 pm
Now that we have seen an early rally from Jan 2011-Aug 2012Can this theory work when the market has done so well
during these last 17 months it does not support this theorys predictions? I do not see any clear trends yet even though the
market is up during these last 17 monthsthen is this theory missing a derivative that reinforces it? I see growth for last two
years are we now expected to see a collapsed market for the next two years. Does the 2 years growth then two years
decline cyclical projections seem to make sense now.
John Schmertz
October 4, 2012 at 7:54 am
Thought you folks might be interested in this site. Has a number of different views of the major secular market cycles of the
last 100 years:http://www.macrotrends.org/series/stock-market-cycles