Jeff Hirsch on Presidential Market Cycles

Published Jan 29, 2025, 4:24 PM

What does history inform us about how newly elected presidents impact the market cycle? What should investors expect from the next 4 years? Jeffrey Hirsch, editor of the Stock Trader’s Almanac, speaks with Barry Ritholtz about how each year of any President’s term impacts markets in a different way.

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New year, new president, new policies. What can we expect when a new president takes over the White House. I'm Barry Ritholtz, and on today's edition of At the Money, we're going to discuss how presidential cycles affect markets and equities. To help us understand all of this and its implications for your portfolio, let's bring in Jeff Hirsch. He's editor in chief of the Stock's Almanaccents May two thousand and three, and in twenty eleven he was the author of the book Super Boom, Why the Dow Jones will hit thirty nine thousand, and How you Can profit from it. Full disclosure, I wrote the forward to that book. So let's jump right into the presidential cycle theory. Your father, Yalehirsh, developed this concept in nineteen sixty seven. Explain his theory.

Yeah, Yale really put the presidential cycle the fuer cycle on Wall Street's map when he've published a first almanac back in sixty seven. Bottom line, it's about presidents trying to get reelected. They try to make voters happy. Uh, prime the pump in the third year. We've got a whole page on how the government manipulates the economy. Most recently, the twenty twenty three Startschriter's Almanac, and they really try to prop it up in the third year, and they take care of their least savory policy initiatives and agenda items in the first two years. I think what we've seen recently with Trump two point zero on day one, et cetera, as a case in point of that, trying to get a lot of stuff done. Foreign adversaries tend to test new administrations early on. Ukraine in twenty two is a good example of that, and it sort of creates this tendency for bear markets in the midterm year and that sweet spot of the four year cycle, the Q four of midterm year to Q two pre election year, and if you remember, October twenty two is pretty much a textbook midterm class at October bottom.

So nineteen sixty seven seems like a long time, different economy, different market, different credit cycle. How has the theory evolved since let's call it fifty seven years ago.

Yeah, well, I mean the first two years have been notoriously weak. I think the biggest change has been post election years, which is what we're in right now A twenty five have gotten much better. It seems to be sort of the same, you know, priming of the pump ahead of the midterm cycle now where they're trying to hang on to it as many congressional seats as possible. So post election years have improved dramatically since World War Two, actually more dramatically since nineteen eighty five, with now averaging seventeen point two percent in post election years eight up, two down, best average gain in the four year cycle, besting the pre election year, which you know is the best over the longer term at fifteen point two percent.

But the pre.

Election year only has one loss, even though the average is a little bit lower.

So it's pretty bullish for twenty twenty five for me, you know, I'm looking at an up year.

Eight to twelve percent is my base case, with some pullbacks in Q one and Q two, but you know, not the twenty plus percent we've had the past couple of years.

So I think back since this theory came out in sixty seven, Nixon, Ford, ever, so briefly Carter Reagan, Bush, Clinton for two terms, Bush two for two terms, Obama for two terms, Trump, Biden, and then Trump again how has the p finential cycle theory held up over all those different presidents?

Pretty good in general, except for the nineties. You know, the dot com boom pretty.

Much straight up during the late nineties. But there have been some derailments.

I mean a lot of this is on page one thirty of your Handy Stock Traders Nomanact, the whole four year cycle, which I always keep in my desk you can refer to yourself. There's been some derailments. It's not perfect, you know, As I said, we had the Super Bowl in the nineties. In the two thousand, COVID was that sort of big oversold by there was? It still a good year. The last cycle, which I just you know reset for subscribers twenty twenty one to twenty four was pretty textbook. So, you know, not perfect, but it works pretty damn well over the long haul.

So let's talk about the strongest year tends to be the third year of presidential terms. Historically, the kick out all the stops, everything they could do in year three tease them up for the election year, regardless of whether it's them running for reelection or their party. They really tend to send this hire and as you mentioned in twenty twenty four plus twenty five percent is a monster year. Hold aside how the incumbent party loses with the economy up as much as it was in the stock market up that much. But what are the factors that drive this pattern. It's been the most consistent part of the cycle. The third year almost always seems to do really well.

I mean, you got to repeat what we just said. I mean, it's prime of the pump. It's how the government government, it relates to communist stay in power. There's a whole list of items with changing Social Security payments. I mean, even in New York State, you're a New York State rep. You got a check from Kathy Hochel just ahead of the election.

I mean it it's down to the governor's level. They're not even trying to hide it anymore.

It's just, you know, they're doing everything they can to secure their legacy, to retain power for themselves, their party, to make voters happy going into the booths.

And that's what creates that.

They got to do it ahead of time because they're gonna be campaigning in the election year, so they got to do a lot of these things to prime that pump. In the pre election year, and that's the most consistent part of it. I mean, it really sets up that sweet spot that we talk about.

Plus it does take a little while for things like fiscal spending and tax cuts to make its way through the economy. If the third year is the strongest, what's historically the weakest year and what are the factors that hold that back?

It's the midterm year, the second year, the second year, sorry, we call them post mid and pre that's Yales, Yale's elder mccagy.

Yeah, second year.

I mean, we had we were all over this in twenty twenty two. Putin invading Ukraine helped. I think part of the reason that he went in was because of the timing of the cycle where he knows and for other foreign adversaries know that there's there's there's.

A vulnerability there in America.

But it's it's the midterm year, and that you can see it on our charts. We do the four year cycle UH breakdown by quarters. The weak spot is Q two and Q three. The midterm year dows down on an average two percent s and P two and a half NASDAK minus six point six, and that sets up that sweet spot.

Huh. Really interesting. Any difference in the historical data between let's say a president has two terms between the four year cycle of term one and the four year cycle of term two, or does it not matter.

It's a little bit better, not not much term two in term two.

The assumption being, Hey, if the economy is good enough for them to get re elected, then everything should be firing.

Yeah, especially in that post election year, the fifth year of a presidency. You know, they've got more of a mandate. You know, we've seen you know, on average about nine point seven percent for the S ANDP in those fifth years versus what it's about, you know, all years about nine and a half percent of the all post lectures a little bit lower than that, but it's been a lot.

Better in recent history.

You know, you go back to you know, nineteen seventeen, nineteen thirty seven, fifty seven, seventy three, all week years in that fifth year, but since since eighty five, you know, post lecture years fifth years are great.

Here's a totally random question, and I know there's no real good answer to this. Does it matter if the presidential terms are non consecutive? I know we have now a data set of one before this, maybe maybe one.

I mean eighteen ninety three, we had the Panic eight to ninety three, the depression from eighteen eighty three to nineteen ninety seven, we had what was there even indoor plumbing everywhere back then.

I don't think.

Not exactly the same market, No.

Not exactly the same world. I mean from Fiddler, it's a new world guildough.

You know, I mean, it's much different, but it's still all about building their legacy, keeping the party in power, and a little bit of ego involved there. But it's trying to make things look as great as possible for their party and their and their legacy.

So it's funny we're talking about eighteen ninety three. It feels like America today is more partisan and more polarized than it's been certainly in our lifetimes. Does that have any impact on the presidential cycle.

I don't think so. I'm not sure if it's if it's perception. You know, we know each other a long time. We know a lot of the same people in the business. I have a lot of friends from different points of view. There's people in the business different point of view, but when we talk about things, there's a lot more in common than different, even with the people on different ideology and different political points of view. So, if anything, I think it might amplify the four year cycle because it's more incumbent upon the incumbents pardon the alliteration there to to retain power and to try to keep their party in Congress. And I think it could really amplify it.

So you're a data wonk. You've been going through the Stock Traders Almanac for your whole career. You're always looking at all these fascinating numbers and market data. What's been the biggest surprise or anomaly you've observed in presidential market cycles.

First of all, I grew up doing this.

I mean I took over the editorship, you know in O three I think is the where you mentioned it. But you know, I grew up running these numbers by hand and at a baron, so a little ruler and a red pen and you know, an aiding machining graph paper with a pencil. The biggest surprise, I think is this the record of the Dow in pre election years of no losses since nineteen thirty nine until twenty fifteen, so from forty three to twenty three in post election years excuse me, pre election years. The Dow is twenty and one.

Wow.

And then the other thing with the four year cycle. There's a couple other discoveries of the things we made, but for the four year cycle. This thing I mentioned earlier was the post election year flipping from being the worst you know, in the big history in the back of the almanac, like I mentioned, to being the best in s eighty five.

So why do you think that is the first year slump just hasn't materialized since really since the financial crisis. Are we blaming accrediting low interest rates in the FED for this or is it something else?

I think it has something to do with the compression of the cycle that I've talked about, you know, where midterms have become much more important to hang on to the slim margins we've seen in recent years, and you kind of have that almost you know, second pre election year, the post election year, or the first year of the term is really the pre midterm election year where they've got to do stuff to make voters happy so that they can keep their party in Congress as well or win back some seats, whatever it might be at the time.

So our final question, how should investors think about their investment postures relative to presidential cycles.

Well, you know, we have a strategy where we use the seasonality the best and worst months in conjunction with the four year cycle.

We basically stay in from.

The mid term low you know, the midterm bicycle in October through the post election year April May.

So basically you want to avoid the week spots. Q one post election year.

Q one first year is one of the weak spots, not quite as bad, but the real one I mentioned before Q two and Q three the midterm year, and you want to back up the truck for the sweet spot for that you know October by in the midterm year like we had in the classic one we had in twenty two. And I think you want to you know, be leary of you know, getting in and out at times when the cycles troughing or peaking, just like you would do with the seasonal cycle. So basically you want to be long Q four midterm year through the post election year first quarter.

And sort of be more cautious in those two years.

So to wrap up, investors with a long term perspective should prepare themselves for a little bit of softening following the first quarter of a new presidential term, maybe at lasts four quarter six quarters. Historically it's a little weaker than the rest of the cycle. When it makes that low, whether that's the summer or October of the midterm year, that's what tees you up for really the best historical returns within a new presidency. So strap yourself in. Could get a little shaky for the next couple of quarters, but the payoff for that is from the midterm cycle through the last year of the presidency. I'm Barry Dults. This is Bloomberg's at the moment.

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