The presidential election is one year away, on November 8, 2016. The question is: Does that mean anything for the stock market?
A number of stock market researchers have identified a four-year market cycle keyed to presidential elections. According to a report from Benchmark Capital Group, returns during the first two years of a presidential term average about 7 percent. But the third year sees an average jump more like 17 percent, followed by another 10 percent hike during the election year itself.
Furthermore, the so-called annual cycle suggests that while stocks struggle from May through October, they tend to outperform from November through April. According to Benchmark, gains average less than 7 percent in the summer season, but over 13 percent during the winter months.
Put these two trends together, and the odds are that the stock market will go up for the rest of 2015, and go up more for 2016. But once a new president takes office in 2017 conditions may turn more troublesome.
A study by Marshall Nickles of Pepperdine University concluded that bear markets typically occur at the beginning of a presidential term and bottom during the midterm Congressional elections. Then stocks rise during a president’s third and fourth years in office. The study suggested that investors who bought stocks and held them for the first two years of presidential terms, then sold them, would actually have lost money. But investors who bought and held stocks in the second half of presidential terms, then sold the day presidents were inaugurated, would have made money every time.
A study from John Hancock Mutual Funds confirms the observation, finding that the stock market ekes out small profits during a president’s first two years in office, then gains altitude during the president’s second two years.
But what about the presidential election year of 2008, when stocks nosedived over 30 percent? That was an anomaly, according to Nickles.
So what about now? The U.S. stock market followed suit in the last presidential election year. It went up 13.4 percent in 2012. However, over the next two years — the years when the markets were supposed to be cooling — stocks continued to heat up, by 29.6 percent in 2013 and another 11.4 percent in 2014. This year, the supposedly strong third year of the presidential cycle, the S&P index is virtually flat. This time around, the stock market may not be performing according to script.
Nickles and others caution that while the presidential cycle theory is historically accurate, it does not necessarily predict stock prices. The market is subject to various forces, many of them unforeseeable, such as whether or not the Federal Reserve will raise interest rates. Therefore, Nickles cautions that a recognized pattern may not anticipate the next turn in the market. And as legendary investor Marty Zweig observed, once a trend in the stock market has been recognized and widely accepted, that’s exactly when the pattern falls apart.
Still, the stock market is a game of probabilities. The report from John Hancock Mutual Funds puts the chances of a stock market gain during a presidential election year at 78 percent. Those are pretty good odds, perhaps not for all of your retirement assets, but at least for some of them.
Does it matter who wins the election? Some investors believe Republicans favor big business, while others think the government regulation Democrats favor brings openness and transparency to business, more government spending on infrastructure and other programs that help spur the economy. And if workers get paid more they have more to spend. Who knows? The record shows that, over time, neither Republicans nor Democrats have proved better or worse for the stock market. The market was bad under Democrat Jimmy Carter, but thrived with Republican Ronald Reagan. Then it gained while Clinton was president, struggled under President Bush, then revived during the Obama years.
So mark your calendar. The presidential cycle — if you believe this theory — suggests that despite all the uncertainties, we should buy stocks and hold onto them through 2016, then turn more cautious as the new president is inaugurated in January 2017 — whoever he or she may be.
Tom Sightings is the author of “You Only Retire Once” and blogs at Sightings at 60.
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Why Now is the Time to Get Into the Market originally appeared on usnews.com