Best Funds For Presidential Election Cycle

Do Certain Funds Benefit From Presidential Elections?

What are the best fund types for the presidential cycle?. Getty Images

Every four years, when another U.S. presidential election rolls around, investing and market timing strategies about the presidential election cycle gain new media attention.

Of course, there is no sure-fire way to predict the stock market, and the direction of prices for stocks and bonds has much more to do with prevailing economic conditions than the timing of a presidential election. But is there any truth to predictor?

If so, which are the best funds to buy before or after the election?

How the Presidential Election Cycle for the Stock Market Works

The Presidential Election Cycle is a theory first developed by a stock market historian named Yale Hirsch. The theory evolved to be used as a market timing indicator for stock investors.

Here are the fundamental assumptions, in relation to stock market performance, for each of the four years of a US President:

  • In years one and two of a presidential term, the President exits campaign mode and works hard to fulfill campaign promises before the next election begins. For this reason, the first year is typically the weakest of the presidential term and the second year is not much stronger than the first.
  • The trend of relative weakness in the first few years is because campaign promises in the first half of the presidency are not typically aimed at strengthening the economy; they are aimed at political interests, such as tax law changes and social welfare issues, which are not always beneficial for stock prices.

  • In years three and four of the Presidential term, the President re-enters campaign mode and works hard to strengthen the economy. For this reason, the third year is typically the strongest of the four and the fourth year is the second strongest of the four.
  • Therefore, in general, the second half of the presidential term is usually stronger than the first because of economic stimulus, such as tax cuts and job creation.
  • To summarize, the performance from best to worst, as stock prices relate to the presidential cycle, it is third year, fourth year, second year, first year.

Best Funds for the Presidential Election Cycle

Although every president's term has different social and economic challenges and strengths, the best funds based upon the election cycle could look like this, assuming the historic averages prevail:

Can Investors Really Profit By Timing Investments With Presidential Elections?

The presidential election cycle sounds logical on the surface. But does it really work? As with any market timing strategy (or theory), the overall pattern of investment performance related to the presidential election cycle may be convincing but the pattern is based on averages.

But there is no such thing as an "average" presidential cycle! All of the different cycles are averaged together to arrive at a trend.

For example, although stock market performance in the first three months of Barack Obama's presidency was weak, the first two years of his first presidential term as a whole were much stronger than his third year. And the fourth year was not the strongest of the four, as the presidential cycle would predict. The first two years of his second term were stronger than the last two, again counter to the cycle predictor.

Also, George H.W. Bush's first year was much stronger than his third and fourth and Bill Clinton had strong first years in both of his terms.

Perhaps the first year of a presidential term has evolved in recent decades to extend the fourth year of the previous cycle?

Bottom Line: A wise investor will consider the presidential election cycle as only one of many factors influencing economic and market conditions. Certainly, politics do play a role in financial markets and the legislation passed in Congress (often originating from a sitting President's legislative agenda) can have a significant impact on corporate earnings. However, the timing of any given year of a sitting U.S. President's term is just one factor in influencing market risk, which can include world economic conditions, interest rates, and investor psychology.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.