Presidential elections have always been a part of the wavelike advances and retreats of the broad market and understanding how they affect the long-term ebb and flow of aggregate stock prices are an essential component of successful investing. The current period offers an excellent opportunity to compare present cycles with past trends. Many historians thought that equity markets would continue to flourish in 1999 as there hasn’t been a down year in the third year of a presidential term since the war-torn era of 1939. The only severe loss in a pre-presidential election year (since 1914) occurred just after the Depression in 1931.
The four-year presidential term has perpetuated a well-defined stock market cycle. Most bearish trends occur in the first or second year after elections. Then the market improves because each new administration usually does everything in its power to boost the economy so that voters are in a positive mood for the next election. History suggests the winning streak will continue and that the market in pre-presidential election 1999 will gain ground before years end. Prospects improve considerably when the market has experienced a correction, or has spent a long period moving sideways, as it has in the last few months. It’s no small coincidence that the last two years (the pre-election year and election year) of the 42 administrations since 1832 produced a total net market gain of over 700%, well above the 235% gain for the first two years of these administrations. The time spent in office also coincides with many significant historical events. Wars, recessions and bear markets tend to start or occur in the first half of the term while prosperous times and bull markets usually follow in the latter half.
The complex facets of our economy that determine the overall financial health of the nation and key events that affect our country are anticipated by the emotion of the market. Any study that compares these historical events with the movement of the major indices will demonstrate how war, recession, and electing a president can influence the current cycle. These actions all have a profound impact on the economy and the stock market. It is important to become familiar with historically repetitive rhythms in the market and apply this knowledge as a practical part of your long-term investment strategy.