4 Year Presidential Cycle

I have always wondered how the Presidential Cycle plays out in the 2nd term of a
Presidency; Unfortunately, there are not enough post-war 2 termers
around — Eisenhower, Reagan, and Clinton — to draw any firm
conclusions as to how this year’s cycle may unfold this year.

Regardless, this is an informative chart from Birinyi Associates:

Average S&P 500 Performance During Year Two of a Presidential Term: 1962 – 2006
click for larger chart


Source: Birinyi Associates, Inc.

We’ve discussed this phenomena many times in the past; Note the big failure year for the cycle was 1986, with the correction low postponed to 1987.

Birinyi Associates observes:

As the table [below] details, there is some truth to this theory as the second year has been the worst of the four-year cycle in over half of the 11 full cycles since 1962, and it is the only one with an average negative return. We also plotted the YTD performance of the S&P 500 this year vs. the average second year return since 1962. As the chart (above) shows, there is a good degree of similarity between the patterns of this year vs. prior years.




UPDATE June 28, 2006 5:58am

Some skepticism about the 4 year cycle leads me to show these additional charts and table. Note that the 2nd year low presents an unusually good buying opportunity:

Table:  1919 – 1998


This chart runs from 1950 to 1998; I find it rather persuasive:


I first posted the original larger version here.

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What's been said:

Discussions found on the web:
  1. abe commented on Jun 27

    Under the heading “Worst Analysis Ever” I submit the following: Reagarding the FOMC decision “The least probable event would be no rate hike at all since there is no indication of this in the futures market. A substantial rally would almost certainly take place if the markets were surprised by the Fed, since the market has in no way discounted this possibility. This would apply to the bond market as well (prices up, yield down).”
    They have correctly determined the least probable event. Resulting in a rally? Not so much; with a Fed completely lacking in credibility yields would spike. The dollar would plummet. I’d love to hear how US equities catch any bid in the face of those conditions. The commentary is via theflyonthewall.com blog. Solid service, I guess that lawsuit yesterday resulted in interns running the shop today.

  2. ralph commented on Jun 27

    I understand that there is a lot of policy that can be generated by both the government and private interests in order to try and support the political cycle.

    However, I can’t believe that even all that energy can supercede all the forces that come into play that affect the general economy and the markets. So, where as patterns may develop that show that the effect occurs more times than not, I still find that as a predictive tool of the future that a statistic like this has very little value in how one should trade.

    Sorry Barry

  3. Ned commented on Jun 27

    I am with Ralph. Reminds me of those worthless pages of tables in the Stock Trader’s Almanac that can tell me exactly how many times tomorrow’s date was up or down in the stock market over the past 15 years, as if that has any bearing at all on where the market goes tomorrow. It is a great way fill space and create copy that has the feel of valuable insight, but really nothing is there. But I don’t think that Barry would do anything like that. Perhaps it is nothing more than data lite (Barry does admit this upfront, to his credit!) attempt to paint the market’s backdrop at this point in the lame duck presidential cycle…sort of.

  4. Zephyr commented on Jun 27

    The chart cheats by using a much differnt starting point for the average and for the current pattern. The shape of the pattern is similar but one line is an increasing loss position while the other is a deflating gain – a major consideration.

  5. Barry Ritholtz commented on Jun 28

    I find the math persuasive: the average Stock market performance during the 2nd year of a Presidential term since WWII is negative (-2.6%); the other 3 years are all substantially positive (5.5%, 19.9%, and 10.8% since 1961).

    Note that the 3rd year returns from the low point in year 2 are way above historical trend.

    I’ll put up a 2nd chart and see if that impacts your thinking on this.

  6. d333gs commented on Jul 28

    I find this cycle very interesting ,it would be great to see any more charts you have on this. With the 40week cycle low due in September and the 4 year cycle low due in October, this proves to be an ‘interesting’ fall season.

  7. Steve commented on Aug 28

    I keep remembering, Bush’s comment not long ago. He said, Economy is strong and I intend to keep it that way.

    I strongly believe he will keep it that way.

    He went as far as invading Iraq with his interest in mind. Keeping economy that way is a piece of cake for him. Don’t mess with his ambitions. Every thing will be engineered to be OK for neocons to be elected again.

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