Presidential Election Cycle Theory: Meaning, Overview, Examples

Presidential Election Cycle Theory: Meaning, Overview, Examples
Presidential Election Cycle Theory: Meaning, Overview, Examples

Presidential Election Cycle Theory: Meaning, Overview, Examples, What Is the Presidential Election Cycle Theory? The presidential election cycle theory, developed by Stock Trader's Almanac founder Yale Hirsch, posits that equity market returns follow a predictable pattern each time a new U.S. president is elected. According to this theory, U.S. stock markets perform weakest in the first year, then recover, peaking in the third year, before falling in the fourth and final year of the presidential term, after which point the cycle begins again with the next presidential election.

The Core Idea

Understanding the Presidential Election Cycle Theory

Developed by stock market researcher Yale Hirsch, the presidential election cycle theory suggests that a shift in presidential priorities significantly influences the stock market. According to the theory, the second half of a presidential term sees the strongest market performance as the sitting president aims to boost the economy for re-election.

Key Aspects

The Presidential Election Cycle Theory vs. Historical Market Performance

Examining data from the past several decades, the theory proposes a stock surge during the third year of the presidential term. Market researcher Lee Bohl's analysis from 1933 to 2015 revealed the S&P 500's average returns in each year of the presidential cycle. Notably, the third year showed a significant average return of 16.3%.

Market Performance Insights

Over the past 80-plus years, the third year of the presidency has seen an average stock market gain of more than 16%, showcasing a consistent trend. However, the limited number of election cycles makes it challenging to draw definitive conclusions about the theory's overall reliability.

Challenges and Exceptions

Limitations of the Presidential Election Cycle Theory

The predictive power of the theory has been mixed, with slightly sluggish average market returns in the first two years. However, the bullish trend in the third year has proven more reliable, with average gains surpassing other years. The theory's limitations include a small data sample due to the infrequency of presidential elections and the influence of various external factors on the market.

Expert Insights

In a 2019 interview, Jeffrey Hirsch, son of the theory's architect, indicated that the model still holds merit, especially in the third year of the term. However, he acknowledged its susceptibility to unique events in a given cycle and emphasized the importance of considering other factors such as the makeup of the Senate and House of Representatives in assessing market movements.