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. 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. 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.
