The Stock Market's Election Cycle

by: Eddy Elfenbein

Eddy Elfenbein submits: A few months ago, I wrote about the stock market’s election cycle. This is one of those bits of market trivia that I usually don’t have much faith in. But I have to admit that the evidence is pretty strong that the market follows a four-year cycle.

The indexes seem to have several major bottoms during mid-term election years (see here). In April, I crunched the data from Ibbotson and Associates to see what the average cycle looks like, and this is what I got:

You can see that the market runs into a wall in the year after an election, and stays flat through most of the mid-term election year. The theory is that the incumbent president tries to make the economy look great for Election Day, and everything goes to hell shortly afterward. This data was based on the market’s total return (dividends included) from 1926 through 2005.

The data I had was monthly, and I wanted to see if I could narrow it some. I looked at all the daily closings for the Dow Jones from the start of 1929 through this past Tuesday. That’s roughly 19-1/3 election cycles. This is slightly different because it’s just one index and dividends aren’t included, but I do have the benefit of zeroing in on a specific day.

This is the average Dow election cycle looks like:

You can certainly see a similar pattern here. The market hits its low on September 30 of the mid-term year (not too far away!) and peaks on August 3 of the post-election year. In that 14-month period, the market declines an average of 9.4%. The market is up 46.8% over the other 34 months.

What I really found surprising is that the bullish period is very heavily concentrated within the first 12 months.

From September 30 of the mid-term to September 13 of the pre-election year, the Dow is up an average of 31.6%. To put that in perspective, the Dow averages a gain of 33.1% over the entire four-year period. So every four years, 95% of the market’s capital gains is squeezed into a one-year period.

If you’re curious, the market’s best day during the four-year cycle is on September 21 of the election year (+1.15%, thank you 1932) and the worst day is October 19 of the pre-election year (-2.04%, thank you 1987). And mostly importantly, Leap Day is slightly positive (+0.12%).