At The Money: Jeff Hirsch on Presidential Investing Cycles. (January 25, 2025)
What does history inform us about how newly elected presidents impact the market cycle? What should investors expect from the next 4 years?
Full transcript below.
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About this week’s guest:
Jeffrey Hirsch is editor of the Stock Trader’s Almanac & Almanac Investor Newsletter.
For more info, see:
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Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg. And find the entire musical playlist of At the Money on Spotify
Previously:
At the Money: Seasonality In Stocks (December 21, 2023)
Hirsch’s WTF Forecast: Dow 38,820 (September 28, 2010)
Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It (April 12, 2011)
Jeff Hirsch on Presidential Cycles
New year, new president, new policies. What can we expect when a new president takes over the white house? I’m Barry Ritholtz. And on today’s edition of at the money, we’re going to discuss how presidential cycles affect markets and equities to help us understand all of this and its implications for your portfolio.
To help us understand all of this and its implications for your portfolio, let’s bring in Jeff Hirsch. He’s editor in chief of the Stock Traders Almanac since May 2003. And in 2011, he was the author of the book, “Superboom, Why the Dow Jones Will Hit 39,000 and How You Can Profit From It.” Full disclosure, I wrote the foreword to that book.
So, so let’s jump right into the presidential cycle theory. Your father, Yale Hirsch, developed this concept in 1967. Explain his theory.
Jeff Hirsch: Yale really put the presidential cycle, the four-year cycle, on Wall Street’s map when he published the first almanac back in ’67. Bottom line, it’s about presidents trying to get re elected. They try to make voters happy, uh, prime the pump, um, in the third year, um, we’ve got a whole page on how the government manipulates the economy, most recently the 2023 stock traders almanac, and they really try to prop it up in the third year, and they take care of their least savory policy initiatives and agenda items in the first two years, I think what we’ve seen recently with Trump 2.0 on day one, et cetera, is a case in point of that, trying to get a lot of stuff done. Foreign adversaries tend to test new administrations early on. Ukraine in 22 is a good example of that. And it sort of creates this tendency for bear markets in the midterm year. And that sweet spot of the four-year cycle, the Q4 of midterm year to Q2, pre-election year, and if you remember, October 22 is pretty much a textbook, midterm, classic October bottom.
Barry Ritholtz: 1967 seems like a long time, different economy, different market, different credit cycle. How has the theory evolved since, let’s call it 57 years ago?
Jeff Hirsch: The first years have been notoriously weak. I think the biggest change has been post-election years, which is what we’re in right now at 25, have gotten much better.
It seems to be sort of the same priming of the pump ahead of the midterm cycle now, where they’re trying to, um, hang on to as many congressional seats as possible. Post-election years have improved dramatically since World War II and more dramatically since 1985, with the Dow averaging 17.2% in post-election years, 8 up, 2 down. Best average gain of the four-year cycle, besting the pre-election year, which you know Is the best over the longer term at 15.2%, but the pre election year only has one loss Uh, even though the average is a little bit lower. So Uh, it’s pretty bullish for 2025 for me, you know, I’m, I’m looking at a, uh, uh, an up year, 8 to 12 percent is my base case with some pullbacks in Q1 and Q2, but you know, not the 20 plus percent we’ve had the past couple of years.
Barry Ritholtz: I think back, uh, since this theory came out in 67, Nixon, Ford ever so briefly, Carter, Reagan, Bush, Clinton for two terms, 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?
Jeff Hirsch: Pretty good in general. Except for the nineties, you know, the, dot com boom, pretty much straight up during the late nineties. But there’ve been some derailments. A lot of this is on page 130 of your handy Stock Traders Alamanac. I’m going to act the whole four-year cycle, which I always keep in my desk. You can refer to it yourself.
There’s been some derailments, it’s not perfect. We had the super boom in the 90s into 2000. COVID was that sort of big oversold — buy there. Was it still a good year? The last cycle, which I just, you know, reset for subscribers 2021 to 24 was pretty textbook. You know, not perfect, but it works pretty-damn well over the long haul.
Barry Ritholtz: Let’s talk about the strongest year. Tends to be the third year of presidential terms. Historically, they kick out all the stops. Everything they could do in year three, tease them up for the election year. Regardless of whether it’s them running for re election. or their party, they, they really tend to send this higher.
And as you mentioned in 2024, plus 25 percent is a monster year. Hold aside how the incumbent party loses with the economy up as much as it was in the stock market up that much. But what are the factors that drive this pattern? It’s been the most consistent part of the, the cycle. The third year almost always seems to do really well.
Jeff Hirsch: I got to repeat what we just said. I mean, it’s, it’s prime of the pump. It’s how the government manipulates the economy to stay in power. There’s, there’s a whole list of items with changing social security payments. I mean even in New York state, you’re a New York State resident. You got a check from from Gov Kathy Hochul just ahead of the election. I mean, it’s, it’s down to the governor’s level. It’s they’re not even trying to hide it anymore.
It’s just, you know, they’re doing everything they can to to secure their legacy to retain power for themselves, their party to make voters happy going into the booth. And that’s what creates that. They got to do it ahead of time because they’re going to be campaigning in the election year. So they got to do a lot of these things to prime that pump in the pre-election year. And that’s the most consistent. Part of it. It really sets up that sweet spot that we talk about.
Barry Ritholtz: Plus it does take a little while for things like fiscal spending and tax cuts to make its way through the economy.
If the third year is the strongest. What’s historically the weakest year and, and what are the factors that, that hold that back?
Jeff Hirsch: It’s the midterm year. The second year. (We call it post, mid, and pre. That’s Yale’s, Yale’s old nomenclature).
We were all over this in 2022. Putin invading Ukraine helped. I think part of the reason that he went in was because of the timing of the cycle where he knows and other foreign adversaries know that there’s a vulnerability therein America, but it’s the midterm year and that you can see it on our charts. We do the four year cycle, breakdown by quarters.
The weak spot is Q2 and Q3 of the midterm year. Dow’s down on average 2%, S&P 2.5%, NASDAQ minus 6.6%, and that sets up that sweet spot.
Barry Ritholtz: 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 or does it not matter?
Jeff Hirsch: It’s a little bit better. Not, not much. In term two.
Barry Ritholtz: The assumption being, hey, if the economy is good enough for them to get reelected.
Jeff Hirsch: Especially in that post election year, the fifth year of a presidency, um, you know, they’ve got more of a mandate. Uh, you know, we’ve seen, you know, on average about 9.7% for the S&P in those fifth years versus what it’s about all years about 9.5% of the all post lectures, a little bit lower than that. But it’s been a lot better in recent history. You know, you go back to, you know, 1917, 1937, ‘57, ‘73, all weak years. In that fifth year, um, but since, since 85, you know, post election years, fifth years are great.
Barry Ritholtz: Here’s a totally random question, and I know there’s no real good answer to this. Does it matter if the presidential terms are non-consecutive? I know we have now a data set of one before this.
Jeff Hirsch: Maybe, maybe one. I mean, 1893, we had the panic in 1893. The depression from 1883 to 1997, we had what? Was there even indoor plumbing everywhere back then?
I don’t think so. Not exactly the same market. No, not exactly the same world. (from Fiddler, it’s a new world, Golda) It’s much different, um, but it’s still all about, building their legacy, keeping the party in power, and, um, a little bit of ego involved there, but, uh, it’s trying to make things look as great as possible for their party and their, and their legacy.
Barry Ritholtz: So It’s funny we’re talking about 1893. It feels like America today is more partisan and more polarized than it’s been certainly in our lifetimes. Does that have any impact on the presidential cycle?
Jeff Hirsch: I don’t think so. I’m not sure if it’s if it’s perception. Um, you know, we know each other a long time. We know a lot of the same people in the business. I have a lot of friends from different points of view. There’s people in the business different points of view. 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.
If anything, I think it might amplify the four year cycle because it’s more incumbent upon the incumbents (pardon the alliteration there) to retain power and to try to keep their party in Congress. And I think it could really amplify it.
Barry Ritholtz: So you’re a data wonk, you’ve been going through the Stock Traders Almanac for your whole career. You’re always looking at all these fascinating numbers and, and market data. What’s been the biggest surprise or anomaly you’ve observed in presidential market cycles?
Jeff Hirsch: First of all, I grew up doing this. I mean, I took over the editorship in 03, but, I grew up running these numbers by hand and out of Barron’s with a little ruler and a red pen and, you know, an adding machine and graph paper with a, with a, with a pencil.
The biggest surprise I think is the record of the Dow in pre-election years of no losses since 1939 until 2015. So from 1943 to 2023 in, in post election years, excuse me. Pre election years, the Dow is 20 and 1.
And then the other thing, with the 4 year cycle, there’s a couple other discoveries and things we made, but for the 4 year cycle, 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 Almanac, like I mentioned, to being the best since 85.
Barry Ritholtz: Why do you think that is the first year slump just hasn’t materialized since really, since the financial crisis? Are we blaming accrediting low interest rates in the fed for this? Or is it something else?
Jeff Hirsch: I think it has something to do with the compressor of the cycle that I’ve talked about where midterms have become much more important to hang on to the slim margins we’ve seen in recent years.
And you kind of have that almost, you know, second pre-election year. It’s the post-election year of the first year of the term is, is really the, the pre midterm election year where they got to do stuff. Uh, to, to make the voters happy, um, so that they can keep their party in Congress as well, or win back some seats, whatever it might, might be at the time.
Barry Ritholtz: So our final question, how should investors think about their investment postures relative to presidential cycles?
Jeff Hirsch: Well, you know, we have a strategy where we use the, the seasonality, the best and worst months in conjunction with the four year cycle. We basically stay in from the midterm low. You know, the midterm buy signal October through the post-election year, April, May.
So basically, you want to avoid the weak spots. 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. And you want to back up the truck for the sweet spot for that, you know, October buy in the midterm year like we had in the classic one we had in 2022.
And I think you want to. You know, be leery of getting in and out at times when the cycle is troughing or peaking, just like you would do with the seasonal cycle. 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.
Barry Ritholtz: 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 – maybe it lasts 4 quarters, 6 quarters. Historically, it’s a little weaker than the rest of the cycle. 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.
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.
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