Jeff Hirsch on Presidential Market Cycles

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 https://url.avanan.click/v2/r01/___https://www.stocktradersalmanac.com/___. YXAzOnJ3czphOmc6YmY2NGI5OTM2ODdmZGQxOGFmZTBmNGNhMmU5OGFlOTM6NzpkOTE0OmM3OGE2NzNjOGJlNzA4NTNhNGU5YTUyNGQwOGNjYzQ1NGM2NzhlMjA5NzExMzk4M2Y1NmEwYjMzMmQ4MTI3OTQ6aDpUOk4, speaks with Barry Ritholtz about how each year of any President’s term impacts markets in a different way. Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

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• 1:30Barry Ritholtz?

  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 Traders Almanac since May 2003, and in 2011, he was the author of the book, Superboom: Why the Dow Jones Will Hit $39,000 and How You Can Profit From It. Full disclosure, I wrote the foreword to that book. So, so let's jump right into the presidential cycle theory.

• 2:14Barry Ritholtz?

  Your father, Yale Hirsch, developed this concept in 1967. Explain his theory.

• 2:23Speaker 04

  Yeah, Yale really put the presidential cycle, the four-year cycle on Wall Street's map when he published the first Almanac back in 67. Bottom line, it's about presidents trying to get reelected. They try to make voters happy, prime the pump in the third year. We've got a whole page on how the government manipulates the economy, most recently the 2023 stock traders 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 2.0 on day one, etc. is a case in point of that, trying to get a lot of stuff done. Foreign adversaries tend

• 3:03Speaker 04

  to test new administrations early on. Ukraine in 22 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 Q4 midterm year to Q2 pre-election year. And if you remember, October 22 is pretty much a textbook midterm classic October bottom.

• 3:25Barry Ritholtz?

  So 1967 seems like a long time, different economy, different market, different credit cycle. How has the theory evolved since, let's call it 57 years ago?

• 3:38Speaker 04

  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 at 25, 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 as many congressional seats as possible. So post-election years have improved dramatically since World War II, more dramatically since 1985, with the Dow averaging 17.2% in post-election years, eight up, two down, best average in the four-year cycle, besting the pre-election year, which, you know, is the best over the longer term, at 15.2%. But the pre-election

• 4:20Speaker 04

  year only has one loss. Even though the average is a little bit lower. So it's pretty bullish for 2025 for me. You know, I'm looking at an up year, 8% to 12% is my base case, with some pullbacks in Q1 and Q2, but, you know, not the 20-plus percent we've had the past couple of years.

• 4:37Barry Ritholtz?

  So I think back since this theory came out in 67 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 presidential cycle theory held up over all those different presidents?

• 5:00Speaker 04

  Pretty good in general except for the 90s you know the dot com boom pretty much straight up during the late 90s but there've been some derailments I mean a lot of this is on page 130 of your handy stock traders almanac the whole four year cycle which you I always keep on 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 boom in the 90s and the 2000 over it was that sort of big oversold buy there was it still a good year the last cycle which I just you know reset for subscribers 2021 to 24 was pretty textbook so you know not

• 5:44Speaker 04

  perfect but it works pretty damn well over the long haul.

• 5:47Barry Ritholtz?

  So let's talk about the strongest year tends to be the third year of presidential terms historically they 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 they really tend to send this higher and as you mentioned in 2024 plus 25% 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 the cycle the third year almost

• 6:31Barry Ritholtz?

  always seems to do really well.

• 6:33Speaker 04

  I mean, you gotta repeat what we just said. I mean, it's it's priming the pump. It's how the government government manipulates the economy to stay in power. There's there's a whole list of items with changing social security payments. I mean, even in New York State, you're you're a New York State rep.

• 6:46Barry Ritholtz?

  Yep.

• 6:46Speaker 04

  You got a a check from from Kathy Hochul just ahead of the election. I mean, it's it's down to the governor's level. It's it's they're not even trying to hide it anymore. Um, it it's just, you know, they're doing everything they can to to secure their legacy, to retain power for themselves, their party, to make voters happy going into the booth. And that's what creates that. They gotta do it ahead of time because they're going to be campaigning in the election year. So they gotta do a lot of these things um to prime that pump in in the pre-election year. And that's the most consistent part of it. I mean, it really sets up that sweet spot that that we talk about.

• 7:19Barry Ritholtz?

  Plus, it does take a little while for things like fiscal spending and tax cuts to make its way through the economy.

• 7:26Speaker 04

  For sure.

• 7:27Barry Ritholtz?

  If the if the third year is the strongest, what's historically the weakest year? And and what are the factors that that hold that back?

• 7:34Speaker 04

  It's the midterm year.

• 7:36Barry Ritholtz?

  The second year.

• 7:37Speaker 04

  The second year, sorry. I we call it post, mid, and pre. That's Yale's Yale's old name occasionally, yeah, second year. Um, I mean, we had, we were all over this in 2022. Uh, Putin invading Ukraine helped. I think part of the the reason that he went in was because of the timing of the the cycle where he knows and for other foreign adversaries know that there's there's there's a vulnerability there um in America, but it's it's the midterm year. And that you can see it on our charts. Um, we do the the four-year cycle uh breakdown by quarters. The weak spot um is Q2 and Q3 of the midterm year. Dow's down on average 2%, S and P 2 and 1/2, Nasdaq minus 6.6.

• 8:22Speaker 04

  And that sets up that sweet spot.

• 8:24Barry Ritholtz?

  Huh, really interesting. When 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?

• 8:39Speaker 04

  It's a little bit better, not not much.

• 8:42Barry Ritholtz?

  In term two.

• 8:43Speaker 04

  In term two.

• 8:43Barry Ritholtz?

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

• 8:49Speaker 04

  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 9.7% for the SNP in those fifth years versus what it's about, you know, all years, about 9.5% of the all post-election years, a little bit lower than that. But it's been a lot better in recent history. You know, you go back to, you know, 1917, 1937, 57, 73, all weak years in that fifth year. But since 85, you know, post-election years, fifth years are great.

• 9:30Barry Ritholtz?

  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.

• 9:42Speaker 04

  Maybe, maybe one. I mean, 1893, we had the panic, 1893, the Depression from 1893 to 1997, we had what? Was there even indoor plumbing everywhere back then? I don't think so.

• 9:54Barry Ritholtz?

  Not exactly the same market.

• 9:56Speaker 04

  No, not exactly the same world. I mean, from Fiddler, it's a new world, Golda, 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 legacy.

• 10:18Barry Ritholtz?

  So, it's funny, we're talking about 1893. 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?

• 10:33Speaker 04

  I don't think so. I'm not sure 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 with different points of view, but when we talk about things, there's a lot more in common than different, even with the people on different ideologies 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 retain power and to try to keep their party in Congress. And I think it can really amplify it.

• 11:15Barry Ritholtz?

  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?

• 11:33Speaker 04

  First of all, I grew up doing this. I mean, I took over the editorship in 03, I think, is where you mentioned it. But I grew up running these numbers by hand at a baron's with a little ruler and a red pen and an adding machine and graph paper with a pencil. The biggest surprise, I think, is the record of the Dow in pre-election years of no losses since 1939 until 2015. So from 43 to 23 in post-election years, excuse me, pre-election years, the Dow is 20 and 1.

• 12:07Barry Ritholtz?

  Wow.

• 12:08Speaker 04

  And then the other thing with the four-year cycle, there's a couple of other discoveries or things we made, but for the four-year cycle, this thing I mentioned earlier was the post-election year flipping from being the worst in the big history in the back of the almanac, like I mentioned, to being the best since 85.

• 12:22Barry Ritholtz?

  So why do you think that is? The first-year slump just hasn't materialized since, really, since the financial crisis? Are we blaming or crediting low interest rates in the Fed for this? Or is it something else?

• 12:34Speaker 04

  I think it has something to do with the compression of the cycle that I've talked about, 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 second pre-election year. The post-election year or the first year of the term is really the pre-midterm election year, where they got to do stuff to make the 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.

• 13:02Barry Ritholtz?

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

• 13:11Speaker 04

  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 midterm low, you know, the midterm bicycle October through the post-election year, April, May. So basically, you want to avoid the weak spots. Q1 post-election year, Q1 first year is one of the weak spots. Not quite as bad, but the real one I mentioned before, Q2 and Q3, the midterm year. And you want to back up the truck for the sweet spot, for that, you know, October buy in the midterm year like we had in the classic one we had in '22. And I think you want to, you know, be leery of, you know, getting in and out at times

• 13:55Speaker 04

  when the cycle's troughing or peaking, just like you would do with the seasonal cycle. So basically, you want to be long Q4 midterm year through the post-election year first quarter and sort of be more cautious in those two years.

• 14:09Barry Ritholtz?

  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 it lasts four quarters, 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 Ritholtz.

• 14:54Barry Ritholtz?

  This is Bloomberg's At the Money.

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