The Presidential Election Cycle and Market Are More Linked Than You Might Think
Does the Presidential election cycle really have anything to do with the economic cycle? It seems difficult to believe the two can be even modestly linked, particularly of late when policy changes seem to have little to no bearing on consumer/corporate consumption behavior.
Yet, the facts are the facts. And the facts are, there may be something to the idea.
On the chart below, in black, is the average "run" of the S&P 500 (SPX) (SPY) over the course of the four years under each Presidential term; the blue line is the "to date" progress of President Obama's second term. The faint, thin blue lines are the actual results the S&P 500 achieved for each of the prior 21 Presidential cycles. [The starting point is the first day of the year after an election is held, or right at the point in time a President is inaugurated.]
First and foremost, don't be too impressed that the S&P 500 has averaged a respectable 31% gain, on average, during each Presidential cycle. The market is supposed to go up, and as you can see, there were some rather bearish cycles, and one good one that really skewed the average return in an upward direction.
That being said, strictly from a visual inspection there may be a little something to the notion that the Presidential election cycle's impact on the broad market. The first year usually is a modestly bullish one. The second year usually is lackluster. The third year usually starts our quite strong even if it tapers off later on, and the fourth year - the election year - tends to be bullish in a slow and steady manner. You can also see that President Obama's second term so far has been a bit of an outlier... in a bullish direction.
As for cause and effect, if there is one, it's apt to be more psychologically driven than policy-driven, but that doesn't make it any less noteworthy, or trade-worthy. Just bear in mind the tendency is just that - a tendency. There are other factors that can and do dictate how well or how poorly one particularly Presidential election cycle follows the typical path. And with the economy at something of a crossroads right now, it's difficult to say which direction the current undertow is pushing as we approach the beginning of a new cycle.