The Little Book of Stock Market Cycles: How to Take Advantage of Time-Proven Market Patterns

Chapter Five

Your Portfolio Gets Political

How the Presidential Election Cycle Impacts the Markets

What happens on Wall Street in inextricably linked to what transpires in Washington. For five decades, the Stock Trader’s Almanac has discussed—and demonstrated—the importance of the four-year presidential election/stock market cycle. The four-year cycle is the “Old Faithful” of indicators for us.

Don’t get me wrong. I am a strong proponent of historical and seasonal market patterns, but also fully aware that history never repeats exactly. History has been a guide for navigating current market conditions and predicting significant future trends with quite a degree of reliability over the years. What we try to get Almanac investors to do is not necessarily follow historical patterns to a “T” but to keep them in mind so they know when their radar should perk up.

How the Government Manipulates the Economy to Stay in Power

Presidential elections have a profound impact on the economy and the stock market. Wars, recessions, and bear markets tend to start or occur in the first half of a presidential term; prosperous times and bull markets, in the latter half. The greatest gains can be noticed in the third years with weakness in the first two years.

This pattern is most compelling. The entire four-year pattern back to Andrew Jackson’s first administration is detailed in Figure 5.1. It is no coincidence that the last two years (preelection year and election year) of the 44 administrations ...