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Will Stocks Rally With The Federal Election Cycle?

May 07, 2019 3:35 PM ETSPDR® S&P 500 ETF Trust (SPY)11 Comments
Brian Sterz, CFA profile picture
Brian Sterz, CFA


  • Federal politics and President Trump continue to be the sun the news cycle revolves around.
  • Since 1950, the S&P 500 has had a positive return in the 12 months following the midterm elections during all 17 election cycles.
  • A strong economy, in theory, could mean more votes, and that re-emerged focus is reflected in stock performance.

Federal politics and President Trump continue to be the sun the news cycle revolves around. The question for investors, though, is whether they also represent the sun the market revolves around—or at least reacts to. This is not a novel theory, nor is it specific to our current President. It’s often said that election cycles are a predictable driver of the market regardless of who’s occupying the White House, much less what news and policies they are generating. The theory was coined by Yale Hirsch, an author and stock market historian, and is usually called the “Presidential Election Cycle Theory."

In a nutshell, the Presidential Election Cycle Theory posits that the first two years after any given federal election will be weaker than the two that follow. The logic behind the theory is relatively simple. Following the election of a new president, the focus is thought to be more on fulfilling campaign promises than necessarily fueling the economy—though of course those two categories can overlap. In the second half of a presidency, the economy takes center stage again as the candidate shifts back to campaign mode. A strong economy, in theory, could mean more votes, and that re-emerged focus is reflected in stock performance.

Numerous data points support the idea that there is a link between stock market cycles and election cycles. According to peer-reviewed research, between 1942 and 2002, there were fifteen stock market cycles, each lasting four years on average. Since the 1920s, the Dow has only risen at a 1% average growth rate the two years after an election, but has grown at a nearly 16% year the two years leading up to the next one—and the trend has grown “more pronounced with time,” according to academic research. The same paper, at the time of publication, showed that

This article was written by

Brian Sterz, CFA profile picture
Brian began in the investment management industry in 2001 and has extensive experience advising institutional and high-net worth clients. As portfolio manager at Miracle Mile Advisors, Brian works with entrepreneurs experiencing liquidity events, corporate professionals and families undergoing generational transfers of wealth. He also serves on the firm’s investment committee. Prior to joining Miracle Mile Advisors, Brian founded and ran Clarity Investment Advisors, a Los Angeles based investment advisory firm. Before starting his own firm, Brian spent 7 years at EP Wealth Advisors as a member of the firm’s investment committee and investment advisor where he focused on fixed income and equity research and security selection, and led due diligence on alternative investments and overall asset allocation decisions for the firm. Brian earned his B.A. from UC Berkeley, and his MBA from UCLA Anderson School of Management. He holds the professional designation of Chartered Financial Analyst (CFA®) and remains active in the CFA® Society of LA as a panel speaker and mentor. He also holds an active life insurance license in California (CA #0L33996). Brian is actively involved with community organizations such as Back On My Feet of Los Angeles and Team-In-Training.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (11)

Gundlach made a serious political and economic prideful blunder in public. Either he knows it, or he will likely continue to be wrong building his position.

What Bill Ackman did was difficult, backstopping Valiant, and allowing Bausch to recover, took heart. That stuff ain't easy. The peer pressure through media is like a hurricane. He did the right thing. That is why he is a winner.

Gundlach's public position will going forward likely be stronger against Trump, in a trade dispute.

There is zero doubt in my mind where, when, and why certain winners will start moving in as Gundlach is drawn deeper into a media influenced reinforced position. The really big winners who understand actually understand economics in a republic, will move into a counter position which will most likely profit them the most without ever having communicated.

Please explain to me how understanding politics, history, and real life couldn't be profitable?

I heard touts on Wall street get top Dollar for much less than that.
Not sure the logic fits the facts. All investing is anticipatory, if the dems are looking like they may win, stocks will go down before the election, if the repubs look strong then stocks will rise. In the case of a surprise then there is a quick correction just after the election like when Trump won. Anticipation of a divided government is a net neutral that wont change direction.

Analyzing elections without including the anticipated outcome prior to the election is useless.
If Trump is re-elected the market will do great

If Bernie is elected the market will implode

It's pretty much that.

Expect volatility into the election cycle, with a big meltup when Trump is re-elected.
AlbTrading profile picture
This is BS. So the market is doing great thanks to Trump? The S&P tanked because of Trump these days.
Z-alpha Trading System profile picture
Our methodology does not depend on anything political.
All lines of communication are in fact political.
@Z-alpha Trading System , I have thought about the level of conviction in your comment, and want to commend you on your what I consider the obvious ability to sift through latency in human crowds, without disturbing your own position.

I believe your strategy is a high probable winner, I don't care what anyone tries to sell me, because I learned that kind of lesson the enlisted mans way.

I wish I met you like 20 years ago. Wow......Nothing but respect. Sincerely.
To the extent that the actual election removes uncertainty, then there is a post election calm. Most of the real action occurs in anticpation before the election.
The answer to that question will depend on who wins. If Trump is reelected, one supposes that the good returns could continue in the near term, to be clouded only at some more distant date if attention were to change to a recession forecast or focus on the growing national debt. This is because many of the President's policies are generally business friendly (for example the reduction in regulations and cut in corporate tax rates). If a Democratic challenger were to win, my guess is that returns would be negative - & it would depend on who that winner is to say how bad the returns would be. This is because, generally, the challengers' policy platforms revolve around business unfriendly and fiscally unsound policies that would result in increased taxes and also increased government expenditures. (Examples are calls for imposition of wealth taxes, hike in corporate tax rates, creation of robot taxes, increased deductions in individual income taxes, calls for free healthcare for all, calls for the implemention of universal basic income, payment of reparations to descendants of slaves, abandonment of use of cheap fossil fuels, added restrictions and costs to the financial system, reimposition of many regulations, etc etc.) The promoted expenditure programs are enormously expensive and mostly un productive from the point of view of supporting equity prices. The amount by which taxes could be raised to pay for such programs would be enormous, making this recessive and risking being on the wrong end of the Laffer curve (ie resulting in a lower total tax take after the hike in tax rates). Under these circumstances, one would imagine that US debt/GDP would deteriorate faster, and that the markets would focus on US debt levels and worry over them sooner. These comments are made from a bird's eye view, without getting into the nitty gritty of each proposed policy and discussing what other benefit -other than the effect on the equity market, that is- they might have. The above is predicated, of course, on no tail-risk event (e.g. war, etc) appearing on the scene. As always, the election will likely be a nail biter til the end; polls will likely be of little help as they will reflect the whims of the party that paid for them, as in the last election - so it will be difficult to make a directional bet in portfolios. Perhaps this could be an occasion for a volatility play.
I consider myself blessed to live in a real republic, designed by real geniuses.

Democracy was never really how we elected our leaders. Knowing that fact, and understanding it are two totally different things.
It is true the way the government works plays a role How the economy works the issue is that this time the problem might be the lack of knowledge the energy needs of the emergency worlds are not properly provide for its to costly and to move forward as a whole world we must begin to have a whole world organization that the needs of the whole world can be more equall providet.
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