Four Year Cycle – A Lengthy Bear Market After The Election?

2020 is drawing to a close. It had a dreadful surprise in store for us with the outbreak of the Corona pandemic, which had a strong impact on financial markets as well.

Furthermore, US presidential elections were held in November. The elections have an effect on stock prices that lasts beyond the day of the election. However, contrary to what many investors believe, prices are not really influenced by the actual outcome of the election.

Rather, what matters to financial markets is which year of the four-year election cycle we find ourselves in. As a matter of fact, the pattern of stock prices barely depends on whether a Republican or a Democrat wins the election. In the past, stock market strength was in evidence under both Democratic and Republican presidents.

The 4-year cycle has a lasting impact on stock markets

Accordingly, the so-called 4-year election cycle phenomenon differentiates not by political party, but by the year of the presidency

In the past 120 years, the Dow Jones Industrial Average (DJIA) on average gained 5.9% in presidential election years. In pre-election years, it did even better, posting a gain of 9.0%. By contrast, in post-election years it rose just 4.5%, and in the subsequent midterm election years just 1.4%.

The 4-year election cycle in detail

But how precisely does the pattern play out? Consider the average four-year pattern of the DJIA over the past 120 years depicted in the chart below. It permits a close look at the patterns within individual calendar years of the cycle as well.

The scale on the right-hand side shows returns in percentage terms. The horizontal scale shows the year in the four-year cycle. Thus, above "Election" the average performance of all election years is shown, above "Post-Elect." that of all post-election years, above "Midterm" that of all mid-term election years, and above "Pre-Election" that of all pre-election years. The strong phases in the election cycle are marked with green arrows, the weak ones with red arrows.

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