Text provided by Stifel Nicolaus
With the presidential election just around the corner, you might be wondering what, if any, effect it will have on the markets. One prominent investment theory seeks to link the two.
Developed by market historian Yale Hirsch, the Presidential Election Cycle Theory suggests that the stock market typically fluctuates in regular patterns over the course of a Presidential term, with the first two years tending to be the weakest, and years three (the pre-election year) and four (the election year) typically offering stronger returns.
While the Presidential Election Cycle Theory has proven to be fairly consistent over the long term, there has been some deviation in recent years. In fact, while the S&P 500 has only had four down election years since the 1928 election, two of them have occurred since 2000: George W. Bush was elected after the bursting of the dot-com bubble in 2000, when the S&P suffered a 9.1% loss, and Barack Obama was elected near the height of the financial crisis in 2008, a year in which the S&P lost a staggering 37%.
Simply dumping stocks in the first two years of a Presidential term could cause you to miss out on significant returns. For example, the S&P 500 gained 10.1% in Bill Clinton’s first year in office, while it gained 33.4% and 28.6% in years one and two of his second term, respectively. And investing only in the two years prior to a Presidential election would not have spared you from “Black Monday” – October 19, 1987 – when the Dow Jones Industrial Average lost 22.6% and the S&P 500 lost 20.5%.
There’s an old saying that successful investing comes from time in the market, not market timing. Most experts agree that determining the “best” time to get in or out of the market can be nearly impossible, and that for most investors, trying to time the market is not a practical investing strategy. Determining exactly when to aggressively invest in or back out of the market takes a considerable amount of expertise and time to monitor market environments. And even the savviest of investors and advisors aren’t immune from making mistakes.
Theories like the Presidential Election Cycle Theory may be interesting, but they shouldn’t form the basis of your long-term investment decisions. Instead, stick to a prudent long-term plan based on your personal financial goals and unique tolerance for risk. Your financial advisor can help you develop investment strategies designed for the upcoming election and beyond.