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Jeff Hirsch on Presidential Market Cycles
Update: 2025-01-29
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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, 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.
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Transcript
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00:01:31
New year, new president, new policies.
00:01:39
What can we expect when a new president takes over the White House?
00:01:44
I'm Barry Rittholtz and on today's edition of At The Money, we're going to discuss how presidential cycles affect markets and equities.
00:01:53
To help us understand all of this and its implications for your portfolio, let's bring in Jeff Hirsch.
00:01:59
He's editor-in-chief of The Stock Traders' Almanac since May 2003.
00:02:04
In 2011, he was the author of the book Super Boom, Why the Dow Jones will hit 39,000 and how you can profit from it.
00:02:13
Full disclosure, I wrote the forward to that book.
00:02:17
Let's jump right into the presidential cycle theory.
00:02:20
Your father, Yale Hirsch, developed this concept in 1967.
00:02:26
Explain his theory.
00:02:27
Yeah, Yale really put the presidential cycle on Wall Street's map when he published the first Almanac back in '67.
00:02:35
Bottom line, it's about presidents trying to get reelected.
00:02:39
They try to make voters happy.
00:02:41
Prime the pump in the third year.
00:02:45
We've got a whole page on how the government manipulates the economy.
00:02:49
Most recently, the 2023 Stock Traders' Almanac.
00:02:52
They really try to prop it up in the third year.
00:02:54
They take care of their lease-savory policy initiatives and agenda items in the first two years.
00:03:00
I think what we've seen recently with Trump 2.0 and day one, etc, is a case in point of that, trying to get a lot of stuff done.
00:03:07
Foreign adversaries tend to test new administrations early on.
00:03:11
Ukraine in '22 is a good example of that.
00:03:14
It creates this tendency for bear markets in the midterm year.
00:03:18
That sweet spot of the four-year cycle, the Q4, of midterm year to Q2 pre-election year.
00:03:25
If you remember, October 22 was pretty much a textbook midterm classic October bottom.
00:03:31
1967 seems like a long time different economy, different market, different credit cycle.
00:03:38
How has the theory evolved since let's call it 57 years ago?
00:03:43
Yeah, well, I mean, the first two years have been notoriously weak.
00:03:47
I think the biggest change has been post-election years, which is what we're in right now at 25.
00:03:52
I've gotten much better.
00:03:54
It seems to be sort of the same, you know, priming up the pump ahead of the midterm cycle now, where they're trying to hang on to as many congressional seats as possible.
00:04:04
So post-election years have improved dramatically since World War II.
00:04:08
It's more dramatically since 1985.
00:04:10
With a down averaging 17.2% post-election years, eight up, two down, best average gain to the four-year cycle, besting the pre-election year, which is the best over the longer term at 15.2%.
00:04:23
But the pre-election year only has one loss, even though the average is a little bit lower.
00:04:29
So it's pretty bullish for 2025 for me.
00:04:32
You know, I'm looking at an up year, eight to 12% is my base case with some pullbacks in Q1 and Q2, but not the 20 plus percent we've had the past couple of years.
00:04:43
So I think back, since this theory came out in 67, Nixon, Ford ever so briefly, Carter Reagan, Bush, Clinton for two terms,
00:04:53
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?
00:05:06
Pretty good in general, except for the '90s, you know, the dot-com boom pretty much straight up during the late '90s.
00:05:15
But there have been some derailments.
00:05:17
I mean, a lot of this is on page 130 of your handy-stock traders on the act to hold four-year cycle, which I always keep in my desk.
00:05:25
You can refer to yourself.
00:05:27
There's been some derailments.
00:05:29
It's not perfect.
00:05:31
You know, as I said, we had the super boom in the '90s in the 2000.
00:05:35
Ovid was that sort of big, oversold by there.
00:05:38
It was still a good year.
00:05:39
The last cycle, which I just, you know, reset for some scribers, 2021 to '24, was pretty textbook.
00:05:48
So, you know, not perfect, but it works pretty damn well over the long haul.
00:05:53
So let's talk about the strongest year, tends to be the third year of presidential terms.
00:05:59
Historically, they kick out all the stops.
00:06:02
Everything they could do in year three, tease them up for the election year.
00:06:07
Regardless of whether it's them running for re-election or their party, they really tend to send this higher.
00:06:14
And as you mentioned in 2024, plus 25% is a monster year.
00:06:19
Hold aside how the incumbent party loses with the economy up as much as it was in the stock market up that much.
00:06:27
But what are the factors that drive this pattern?
00:06:30
It's been the most consistent part of the cycle.
00:06:35
The third year almost always seems to do really well.
00:06:39
I mean, you gotta repeat what we just said.
00:06:41
I mean, it's prime of the pump.
00:06:42
It's how the government manipulates the economy to stay in power.
00:06:46
There's a whole list of items with changing Social Security payments.
00:06:49
I mean, even in New York State, you're a New York State rep, you gotta a check from Kaffee Hocal just ahead of the election.
00:06:56
I mean, it's down to the governor's level.
00:06:58
They're not even trying to hide anymore.
00:07:00
It's just, you know, they're doing everything they can to secure their legacy, to retain power for themselves.
00:07:07
They're a party to make voters happy going into the booth.
00:07:10
And that's what creates that.
00:07:11
They gotta do it ahead of time because they're gonna be campaigning in the election year.
00:07:14
So they gotta do a lot of these things to prime that pump in the pre-election.
00:07:19
And that's the most consistent part of it.
00:07:21
I mean, it really sets up that sweet spot that we talk about plus it does take a little while for things like fiscal spending and tax cuts to make its way through the economy.
00:07:31
If the if the third year is the strongest, what's historically the weakest year?
00:07:37
And what are the factors that hold that back?
00:07:40
It's the midterm year.
00:07:41
Second year.
00:07:42
The second year.
00:07:44
Sorry, we call it post-mid and pre.
00:07:46
That's Yale's old nomically.
00:07:48
Yeah.
00:07:48
Second year.
00:07:49
I mean, we had, we were all over this in 2022.
00:07:53
Putin invading Ukraine helped.
00:07:56
I think part of the reason that he went in was because of the timing of the cycle where he knows, and for other foreign adversaries, know that there's a vulnerability there in America,
00:08:10
but it's the midterm year.
00:08:12
And that you can see it on our charts.
00:08:14
We do the four year cycle breakdown by quarters.
00:08:19
The weak spot is Q two and Q three of the midterm year.
00:08:22
Dowsed down on average, two percent, S and P two and a half.
00:08:25
Nasdaq minus six point six.
00:08:27
And that sets up that sweet spot.
00:08:29
Huh.
00:08:31
Really interesting.
00:08:32
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,
00:08:43
or does it not matter?
00:08:45
It's a little bit better, not much.
00:08:47
In term two, the assumption being, hey, if the economy's good enough for them to get reelected, then everything should be firing.
00:08:54
Yeah, especially in that post election year, the fifth year of a presidency, you know, they've got more of a mandate.
00:09:04
You know, we've seen, you know, an average about 9.7% for the S and P in those fifth years versus what it's about, you know, all years, about nine and a half percent of the all post election years a little bit lower than that.
00:09:17
But it's been a lot better in recent history.
00:09:21
You know, you go back to, you know, 1917, 1937, 57, 73, all week years in that fifth year.
00:09:30
But since since 85, you know, post election years, fifth years are great.
00:09:36
Here's a totally random question.
00:09:38
And I know there's no real good answer to this.
00:09:40
Does it matter if the presidential terms are non consecutive?
00:09:44
I know we have now a data set of one before this and maybe one.
00:09:48
I mean, 1893, we had the panic 893, the depression from 1893 to 1997.
00:09:55
We had what was there even indoor plumbing everywhere back then?
00:09:59
I don't think not exactly the same market.
00:10:02
No, not exactly the same world.
00:10:04
I mean, from from filler, it's a new world gold.
00:10:06
You know, I mean, it's it's it's much different.
00:10:10
But it's still all about building their legacy, keeping the party in power and a little bit of ego involved there.
00:10:18
But it's trying to make things look as great as possible for their party and their and their legacy.
00:10:23
So it's funny.
00:10:24
We're talking about 1893.
00:10:27
It feels like America today is more partisan and more polarized than it's been certainly in our lifetimes.
00:10:35
Does that have any impact on the presidential cycle?
00:10:38
I don't think so.
00:10:41
I'm not sure if it's if it's perception, you know, we know each other a long time.
00:10:47
We know a lot of the same people in the business.
00:10:50
I have a lot of friends from different points of view.
00:10:52
There's people in the business at different points of view.
00:10:55
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.
00:11:03
So if anything, I think it might have amplified the four-year cycle because it's more incumbent upon the incumbents pardon the alliteration there to retain power and and to try to keep their party in in Congress.
00:11:19
And I think it can really amplify it.
00:11:21
So you're a data wonk.
00:11:23
You've been going through the Stock Traders Home and Act for your whole career.
00:11:26
You're always looking at all these fascinating numbers and and market data.
00:11:32
What's been the biggest surprise or anomaly you've observed in presidential market cycles?
00:11:38
First of all, I grew up doing this.
00:11:40
I mean, I took over the editorship in '03, I think is the where you mentioned it.
00:11:46
But I grew up running these numbers by hand at a barren.
00:11:49
So a little ruler and a red pen and an adding machine and graph paper with a pencil.
00:11:55
The biggest surprise, I think, is this the record of the Dow in pre-election years of no losses since 1939 until 2015.
00:12:06
So from 43 to 23 in post-election years, excuse me, pre-election years, the Dow is 21.
00:12:13
Wow.
00:12:13
And then the other thing with with the four-year cycle, there's a couple of other discoveries I think we made.
00:12:17
But for the four-year cycle, this this thing I mentioned earlier was the post-election year flipping from being the worst, you know, in the big history in the back of the Home and Act, like I mentioned, to being the best in '85.
00:12:28
So why do you think that is the first year slump just hasn't materialized since really since the financial crisis?
00:12:35
Are we blaming accrediting low interest rates in the Fed for this or is it something else?
00:12:40
I think it has something to do with the compressor of the cycle that I've talked about, you know, where midterms have become much more important to hang on to the slim margins we've seen in recent years.
00:12:49
And you kind of have that almost, you know, 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,
00:13:06
whatever it might be at the time.
00:13:08
So our final question, how should investors think about their investment postures relative to presidential cycles?
00:13:16
Well, you know, we have a strategy where we use the seasonality the best and worst months in conjunction with the four-year cycle.
00:13:25
We basically stay in from the midterm low, you know, the midterm bi-signal October through the post-election year April May.
00:13:34
So basically, you want to avoid the weak spots.
00:13:37
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.
00:13:45
And you want to back up the truck for the sweet spot for that, you know, October by in the midterm year like we had in the classic one we had in '22.
00:13:55
And I think you want to, you know, be leery of, you know, getting in and out at times when the cycle is troughing or peaking, just like you would do with the seasonal cycle.
00:14:05
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.
00:14:15
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.
00:14:26
Maybe it lasts four quarters, six quarters.
00:14:30
Historically, it's a little weaker than the rest of the cycle.
00:14:33
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.
00:14:45
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.
00:14:58
I'm Barry Rittalts.
00:14:59
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