(03/22/12) Dispelling Common Election-Cycle Myths

Many investors do not really understand what history says about the performance of the stock market during the four-year cycle, but Mark Hulbert is ready to set the record straight.

Mark, you have done some interesting research recently on investing in an election year. Could you share that with us?

Sure. Well, it turns out the presidential election year cycle is very well known. People often associate the last year of a president’s term as usually being one of the best for the stock market. It turns out that is just not the case.

All myth.

Well, you know, what part of it is not myth is that the third year of the presidential cycle is a very good one for the market. But all the other years—years No. 1, 2, and 4, tend to be more or less right there in the middle. This is an interesting difference between it and the average.

So basically, for a follower of the presidential election year cycle, I would have to say you’re a year late; you should have been investing a year ago. As far as the fourth year is concerned, don’t do anything differently this year just because it is the fourth year.

I was able to confirm this by going through all the newsletter records that we track. It turns out that the newsletters that do the best in the fourth years tend to be the same newsletters that do the best any of the other years as well. So if you look at the rankings, you should look at the rankings and pick an advisor accordingly.

I would not have said the same thing a year ago, interestingly enough. The newsletters that tend to do well in the third year, not surprisingly given that the market goes up, are those that incur the greatest amount of risk. But now is the time to start taking some of that risk off the table, at least if you are a follower of this presidential election year cycle.

Is it specifically the third year that usually the markets outperform, but the other years it is really middling?

That’s right. In fact, if there was any effect other than a third-year effect, it would be that year No. 2 tends to be below average, but it is not sufficiently below average to make anyone think that you should perhaps do a lot different with your portfolio in year No. 2. If there is anything, it would be year No. 2...but years No. 1 and 4 tend not to be particularly different than the average.

So I guess I’m cynical about it. What happens is that people find out about things too late. At the moment everyone discovers “the presidential election year cycle,” it was too late; they should have been discovering it a year ago. Now everyone is paying attention.

And from now on, we are looking at year three, not year four.

That’s right, in fact, I think we should be calling it not a presidential election year cycle, but a third year presidential election year effect, or something like that.

Yeah, the off-year cycle.

Yeah, exactly, because everyone else is focusing on all four years. But at least a statistician would say there is nothing to write home about years No. 1, 2, and 4.