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Let's take a look at how the Dow has performed under the various political configurations in the Presidency and Congress.

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Over the long haul, there are no simple correlations between the market and the party in power.

The Dow and the Presidential Cycle: Where Do We Go From Here?

What does the Presidential Cycle in the market look like? I've often heard that the market tends to underperform during the first two years and outperform during the two years after the interim elections. So I decided to have a look using the Dow as my surrogate for the market. The first chart gives us the historical perspective of annual returns in the Dow, excluding dividends, since 1901. I couldn't resist the urge to label a few outlier gains and losses.

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Now let's chart the Presidential Cycle returns. The columns in this chart show the gain (loss) of the biennial (2-year) Dow closes beginning with 1900. For example, the first column shows the 9.1% loss from the December 1900 Dow close to the December 1902 close. This was the first two years of Theodore Roosevelt's first term (actually Roosevelt was completing the assassinated William McKinley's second term).

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To help us think about the political associations, I've annotated the chart with the Presidents and identified control of Congress by party.

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The sums of the two halves of the Presidential Cycle do show a difference:

  • Sum of all first 2-year cycles is 234.7%
  • Sum of all second 2-year cycles is 557.6%

Over the past 110 years, there have only been five occasions when the second half of the Presidential term has been accompanied by a two-year decline in the Dow. The first half has closed in the red 12 times.

We're now faced with a split Congress, something that's happened during three other periods since 1901. It's been a mixed bag. William Howard Taft spent the last half of his single term with a split Congress. The Dow had a 2-year gain of 7.9%. Herbert Hoover spent his last two years with a split Congress and the worst decline on the chart, a staggering -63.4%. Ronald Reagan faced a split Congress during the first six years of two terms in office. The biennial Dow returns were 8.6%, 15.8% and 56.5%.

Does this review of the Dow and the Presidential Cycle have any implications for the second half of the Obama administration? Probably not. Today's mix of market valuations, Treasury yields, the Federal Funds Rate, and the next round of quantitative easing puts the United States in uncharted territory.

Disclosure: No positions

Source: A 110-Year Look at Politics and the Dow