The Four-Year Election Cycle

Odds aren’t good for those who bet against it.

By Matt Blackman

Since the first U.S. presidency in 1776, the four-year election cycle has had a major influence on the American economy. Every four years, there has been a pattern that while never identical, has demonstrated startling similarities.

Following each election, whether incumbents or newcomers, winners are presented with the task of getting their economic house in order. This often includes correcting the excesses of previous administrations, and this can mean making some painful changes.  Examples include addressing inflation concerns, government spending and balancing budgets. It is also not uncommon that in their zeal to right the economic situation, governments overdo it, which is why many of the worst bear markets in history have begun in post-election years. Examples include 1929, 1937, 1957, 1969, 1973, 1981 and 2001.

But the damage in the early 19^th century seems to have been the worst. For example, between 1833 and 1877, the Dow Jones Industrial Average lost a total 77.5% in the post-election year according to The Almanac Investor. By 1901, the post-election year loss had been pared to 57.8% and by 1925, the loss turned to a modest gain of 6.1%. This means that for investor only investing at the beginning of a new administration and selling at the end of the year would have had to wait 92 years to make money! By 2001, the post-election year gain had grown to 67.9%, which works out to an average of just 1.6% per year.

During the mid-term election year, results improved somewhat. Between 1833 and 2001, total returns for the Dow in the second year of the Presidential term were 159.7% for an average of 3.7%.

But then returns jumped considerably in the third or pre-election year to 457.6% for an average of 10.6% per year.

During the year of the election as political parties diverted their attentions to winning voters hearts and minds across the country investment returns dropped somewhat.  In a total 168-years, the Dow returned of 288.3% or an average 6.7% per election year.

In total over the 168-years, the Dow gained 745.9% in the last two years of the election cycle versus just 227.6% in the first two years (see table below). 

Results have become even more skewed in the last century. Between 1913 and 2005, the Dow Jones Industrial Average has dropped an average 22.2% from its post-election high to a mid-term year low in September of the second year of a mandate, according to The Almanac Investor. The good news is that when governments turned on the printing presses and did what they could to put the economy and voters in better shape in the two years leading up to the next election, the Dow gained an average 50% from the mid-term September low to election year high in November, little more than two years later! 

Table 1 – A comparison of Dow performance in the four years of the presidential or election cycle.

Why is this cycle so predictable? According to Edward Tufte in his 1978 book Political Control of the Economy, it’s government manipulation plain and simple. Let’s look at some charts for Dow between 1888 and 2004.  

Click for Larger View

Figure 1 – Composite of 29 Presidential cycles between 1888 and 2004 for the Dow Jones Industrial Average showing cycle low in September of the mid-term year.  Chart by www.thechartstore.com 

Here are some examples from Tufte’s book to demonstrate how the government did it’s darndest  to put happy faces on voters (and investors) heading into each election from The Almanac Investor.

1)      Federal spending – Between 1962 and 1973 it was 29% higher in election versus non-election years.

2)      Social Security – In total there were nine increases in social security payments between 1952 and 1974. The average increase was 100% higher in election years.

3)      Real disposable income – Not including the Eisenhower presidency, it increased in all but one election year between 1947 and 1973.

So next time you hear about of government generosity in the way of a tax cut, economic incentive, spending initiative, grant or subsidy take a look at the calendar. Chances are they have (or will) come in the last two years of a Presidential mandate and the stock market is (or will be) doing well.