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Author: solasis Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6881  
Subject: presidential cycle Date: 10/17/2002 12:16 PM
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In his interesting book The Stock Traders Almanac, Yale Hirsch documented that one of the most interesting cycles in stock prices is the presidential cycle. Hirsch showed that in almost every administration since World War II, the market was weak in the first 1.5 years of a presidential term, and strong in the remaining 2.5 years. Research that I have conducted taking this analysis back to 1876 shows that the presidential cycle effect is most evident since the creation of the Federal Reserve Board in 1908. Prior to 1908, the reverse was more often the case – the first two years of a president's term were often better than the latter two years.

In the post 1908 data, there are some exceptions, such as the Hoover term, the first Truman term, the second Reagan term, and the second Clinton term, nearly all of which contained significant market crashes or unusual events in the latter half of the cycle (1929-32 smash, Korean war, the 1987 market crash, and the 2000 Nasdaq crash). Otherwise, the market since 1908 has been consistently better in the latter half of the presidential cycle. In fact, the market has only gone down on a calendar year basis in two of the twenty-three presidential election years since 1908; 1932, and 2000 (and in both cases the incumbent party lost the election). Also, it is evident that when crashes come late in the cycle, they are preceded by an inversion of the cycle where the first year of a presidential term is abnormally strong (1929 +40% prior to crash, 1985 +32%, 1999 +24%). Abnormally strong first years in the presidential cycle can be a warning sign of a market bubble brewing. That is not, of course, the case with this presidential term.

Highlighted in red in the following table are the periods where the latter portion of the presidential cycle significantly underperformed (by more than 10%) the first portion of the cycle. This occurred in 8 of the 31 periods (26% of the cycles) for the entire dataset and in 3 of the 23 periods (13% of the cycles) since the creation of the Federal Reserve.

Table 2. Presidential stock market cycle since 1876. (Data from Dr. Siegel at Wharton)

Period Market performance – first 18 months Market performance – last 30 months
1877-80 -4% +71%
1881-84 -3% -31%
1885-88 +21% -2%
1889-92 +11% -2%

1893-96 -22% -2%
1897-00 +20% +36%
1901-04 +22% -1%
1905-08 +13% -3%

1909-12 +1% +8%
1913-16 -16% +23%
1917-20 -24% +6%
1921-24 +24% +21%
1925-28 +14% +91%
1929-32 -14% -68%

1933-36 +42% +75%
1937-40 -40% +5%
1941-44 -21% +56%
1945-48 +41% -19%

1949-52 +23% +39%
1953-56 +14% +50%
1957-60 -4% +29%
1961-64 -9% +56%
1965-68 -1% +9%
1969-72 -28% +49%
1973-76 -21% +25%
1977-80 -19% +18%
1981-84 -16% +49%
1985-88 +56% +15%

1989-92 +24% +21%
1993-96 +4% +64%
1997-00 +49% +46%

The compounded return for the first 18 months is 169% over 125 years (not including any interest that would have been received on non-invested time periods and excluding the effects of commissions, taxes etc), while the compounded return for the latter 30 months in the cycle over the 125 year period is 17,498%. That is not a typo. Despite the fact that the majority of the worst market smash in US history came in the latter half of the 1929-32 presidential cycle, the compounded rates for the latter 30 months of the cycle are amazingly large when compared to the first 18 months in the cycle. In the first case, one dollar would have turned into 169 dollars (not adjusted for inflation) while in the second case, one dollar would have turned into more than seventeen thousand dollars. Even accounting for the different time periods involved (18 months vs. 30 months) the annualized CAGR for the first portion of the cycle was 1%, while the CAGR for the second period was 13.5%. This suggests that all of the long term total return since 1908 has come in the latter 30 months of each presidential term.

Caveat Emptor.

tr
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