Debunkery: Learn It, Do It, and Profit From It—Seeing Through Wall Street's Money-Killing Myths

BUNK 40

PRESIDENTIAL TERM CYCLES ARE STOCK MARKET VOODOO

You may have heard some folks claim there’s a reliable, gameable stock market pattern in presidential terms—that some years are better than others. You may have also heard that since 1926, every single year ending in “5” (1935, 1945, 1955, etc.) has been positive. Every one! But, you’ve also likely been warned these are silly indicators—as good as voodoo.

Yes, the year 5 quirk is just that—a statistical quirk. There have been eight occurrences since 1926. Since stocks rise more than fall, you’d normally expect at least two-thirds of those to be positive anyway. It’s not unreasonable that in eight coin flips, with a coin weighted to show heads two-thirds of the time, that all eight would be heads. It happens. Not all the time. But it does. But it’s still just a quirk.

On the other hand, it’s a myth and bunk that the presidential term is just voodoo—there are forceful fundamentals that can make the cycle gameable.

Table 40.1 shows presidents, their parties, and annual S&P 500 returns broken into first through fourth years of their terms. The two pages split the front and back halves of terms. Immediately you see the first two years have worse average returns with greater return variability. It’s not that years 1 and 2 are inherently bad—there can be great first and second years! There’s just more variability and some big negatives dragging down the averages. But the back half is different—average returns are much better with ...