Presidential election cycle theory is a stock market theory claiming that stock market performance during the second half of a presidential term is superior to stock market performance in the first half of a presidential term.
Learn what presidential election cycle theory is and what it means for individual investors.
Definition and Example of Presidential Election Cycle Theory
Presidential election cycle theory is a stock market performance theory that claims, based on historical data, that stock market performance in the first two years of a U.S. president’s term will likely outperform stock market performance in the last two years of a U.S. president’s term.
Some have suggested this is because presidents seeking reelection focus on economic stimulus in the last half of their terms. The stimulus is meant to boost the stock market and, in theory, give the incumbent president a better chance at reelection.
For example, the years following Richard Nixon’s election in 1968 fits the presidential election cycle theory.
The Dow Jones Industrial Average declined by 15.2% in 1969, then increased by 4.8%, 6.1%, and 14.6% in 1970, 1971, and 1972, respectively. Some attributed the gradual increase in stock performance over the course of the four-year cycle to Nixon boosting the economy to increase his reelection chances.
How Presidential Election Cycle Theory Works
According to presidential election cycle theory, a new four-year stock market cycle begins the year after every presidential election.
Based on the theory, stock market performance is weakest in the first two years of the cycle since wars, recessions, and bear markets tend to occur in the first half of a president’s term, while bull markets occur in the last two years of the cycle.
Although the theory does not perfectly predict market performance—for example, in the last three presidential election cycles, stock market performance was highest in the post-election year—historical data appears to support the theory.
|Cycle Year||Total Percentage Stock Market Gain Since 1833||Average Percentage Stock Market Gain Since 1833|
|Post-Election Year (Year 1)||137.7%||3.0%|
|Mid-Term Year (Year 2)||188.9%||4.0%|
|Pre-Election Year (Year 3)||489.6%||10.4%|
|Election Year (Year 4)||282.4%||6.0%|
What It Means for Individual Investors
Individual investors can use presidential election cycle theory to potentially predict stock market performance based on the election cycle.
However, investors should keep in mind that no expert or theory can predict the future 100% of the time, and historical results are no guarantee of future results.
Criticism of Presidential Election Cycle Theory
Presidential election cycle theory doesn’t always accurately explain stock market performance over the past 40 years. Over the most recent 10 four-year presidential election cycles, the presidential election cycle theory only held true half the time.
|Cycle||Dow Jones Industrial Average Total Percentage Gain, First Two Years||Dow Jones Industrial Average Total Percentage Gain, Last Two Years||Do Results Support Presidential Election Cycle Theory?|
|Reagan (1981-1984)||+ 10.4%||+ 16.6%||Yes|
|Reagan (1985-1988)||+ 50.3%||+ 14.1%||No|
|H.W. Bush (1989-1992)||+ 22.7%||+ 24.5%||Yes|
|Clinton (1993-1996)||+ 15.8%||+ 59.5%||Yes|
|Clinton (1997-2000)||+ 38.7%||+ 19.0%||No|
|W. Bush (2001-2004)||- 23.9%||+ 28.4%||Yes|
|W. Bush (2005-2008)||+ 15.7%||- 27.4%||No|
|Obama (2009-2012)||+ 29.8%||+ 12.8%||No|
|Obama (2013-2016)||+ 34.0%||+ 11.2%||No|
|Trump (2017-2020)||+ 19.5%||+ 29.6%||Yes|
Another criticism of the presidential election cycle theory is that it is at odds with another popular theory of stock market performance—the efficient markets hypothesis—which suggests that no amount of investor analysis and research can help them beat the market in the long run.
However, even proponents of the efficient market hypothesis concede that using presidential election cycle theory to form your investment strategy could potentially provide outsized returns in the short run.
- The presidential election cycle theory is a stock market performance theory that suggests the stock market’s performance is correlated with four-year U.S. presidential election cycles.
- According to the theory, the stock market generally performs worse in the first half of a U.S. president’s term than in the last half of a president’s term.
- While the aggregate data since 1833 appears to support the presidential election cycle theory, it does not predict stock market performance accurately 100% of the time.
- Investors should remember that no expert or theory can predict future stock market performance with absolute certainty and, in fact, some other stock market performance theories suggest that attempting to time the market will not increase an investor’s returns in the long run.