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National Election Cycle and Stocks Over the Long Run

Steve LeCompte | | Posted in: Calendar Effects, Political Indicators

Key Insight

U.S. stocks show mid-term presidential cycle strength only post-1952, with earlier 1873-1952 data showing no pattern (Dec 1872-Aug 2019; Shiller S&P Composite Index; split-sample analysis).

“Stock Market and the National Election Cycle” examines the behavior of the U.S. stock market across the U.S. presidential term cycle (years 1, 2, 3 or 4) starting in 1950. Is a longer sample informative? To extend the sample period, we use the long run S&P Composite Index of Robert Shiller. The value of this index each month is the average daily level during that month. It is therefore “blurry” compared to a month-end series, but the blurriness is not of much concern over a 4-year cycle. Using monthly S&P Composite Index levels from the end of December 1872 through August 2019 (about 37.5 presidential terms), we find that:

The following chart plots average cumulative return of the S&P Composite Index across the four years of the presidential term (Y1-Y4) for the full sample period based on monthly data (M12=December), and for the following subperiods:

  1. January 1983 through December 1952, preceding“Stock Market and the National Election Cycle”.
  2. January 1953 through August 2019, the same as “Stock Market and the National Election Cycle”.
  3. January 1989 through August 2019 for a recent snapshot.

The strong mid-term performance derives almost entirely from data after 1952, perhaps reflecting increasing federal government influence over business/market cycles. Accompanying this mid-term ascendancy is a decline in end-of-term strength, but the last six months of one year (2008) drive this decline.

For another perspective, we look at monthly rather than cumulative returns.

The next chart presents S&P Composite Index average returns by month across the presidential term during 1872-1952 and during 1952-present. This view confirms the change in interaction between political and market cycles.

In summary, evidence from a long run sample suggests a mid-20th century shift toward abnormally strong U.S. stock market performance in the middle of presidential terms.

Cautions regarding findings include:

  • The sample and especially subsamples for presidential term year analysis are not large, so confidence in related tendencies is modest.
  • Trading frictions for strategies designed to exploit any tendencies would reduce returns.

See also “Monthly Returns During Presidential Election Years”.

Further Reading

Calendar Effects, Political Indicators Stock Market and the National Election Cycle Some stock market experts cite the year (1, 2, 3 or 4) of the U.S. presidential term cycle... Calendar Effects U.S. Stock Market Performance by Intra-year Phase The full-year Trading Calendar indicates that the U.S. stock market has three phases over the calendar year, corresponding... Equity Premium, Political Indicators Party in Power and Stock Returns Past research relating U.S. stock market returns to the party holding the Presidency mostly concludes that Democratic presidents... Bonds, Political Indicators, Size Effect Ziemba Party Holding Presidency Strategy Update “Exploiting the Presidential Cycle and Party in Power” summarizes strategies that hold small stocks (large stocks or bonds)... Calendar Effects Year of the Decade Effect? Are some years of the decade better than others for equity markets? To investigate, we look at average... Calendar Effects Stock Returns Around New Year’s Day S&P 500 shows abnormal strength from one week before through two days after New Year's Day, followed by...