Source: Bloomberg & Morningstar
Do US stock markets follow the presidential cycle?
The Presidential Election Cycle Theory, purported by Stock Traders Almanac, proposes that stock performance follows a predictable pattern aligned with the four-year presidential term.
The first two years tend to be the weakest for stocks, according to the theory, as the president focuses on fulfilling their manifesto, but the market improves in the latter half of a term as the president seeks to initiate economic growth to secure re-election.
However, recent history has challenged this notion. For instance, during Donald Trump’s presidency, the S&P 500 surged 19% in his first year and 29% in his third – contradicting the theory’s expectation of weaker initial years.
Additionally, in each of President Barack Obama’s two terms, the first year saw the best annual performance, with the S&P 500 rallying 23% in 2009 and 30% in 2013.
It’s important to note that corporate earnings, central bank policy and macroeconomic shocks tend to play a very significant role in determining equity market performance – often much more so than the impact of elections.
Do US markets prefer a Democrat or Republican president?
Analysis from Allianz shows US equities do better when Democratic presidents are in power. The US equity market delivered a return of 13.8% in nominal terms under Democrats vs 8.9% under Republican presidents.
If we bring inflation into the mix, real returns were 9.7% compared to 5.1%.
However, it’s crucial to approach this information with caution. Macroeconomic events, and factors beyond party control, can significantly impact market performance. For instance, both Trump and Biden faced the unprecedented challenge of the COVID-19 pandemic, which caused major market disruptions regardless of their policies.
This macro randomness can also be applied to more historic presidents also. Republican Calvin Coolidge’s time in office oversaw exceptional equity returns during the mid-1920s.
Yet, the Republicans also presided over the 1929 Wall Street crash under Herbert Hoover who ended up with an annual average return of -27.19%.
Whilst it’s easy to pick out the most eyewatering numbers and draw conclusions, like the COVID-19 example, each presidency has its own challenges which are often not the direct result of the President’s actions. To a very large degree, the markets react to events and what they see approaching in the distance.
Often, investing in an index S&P for a long period of time has historically been a successful strategy for generating a long-term return rather than trying to time politics and elections.
Simply missing the best ten days of the S&P 500 from 1994-2023 would have resulted in a return 54% lower than being fully invested for the entire period. If you missed the thirty best days, the figure shoots down to 83% lower than being fully invested over the period.