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

Dow Jones Industrial Average, 4-year cycle over the past 120 years

Dow Jones 4 Year Election Cycle

The two years following the US presidential election tend to be difficult.
Source: Seasonax

As you can see from the final value shown on the scale, the average gain over the entire four-year period amounted to a strong 22%. As noted above, the strongest stock market performance was delivered in the election year depicted on the left-hand side and the pre-election year on the right-hand side.

By contrast, investors reaped almost no gain in the two years in the middle of the chart, the post-election and the mid-term election year.

These two years are currently lying ahead in 2021 and 2022. They threaten to deliver a worse stock market performance than the two preceding years.

Let us now take a closer look at the year of the cycle coming up next, the post-election year.

The typical pattern of post-election years

The second chart depicts the average pattern of post-election years. It is essentially a magnified version of the second quarter of the first chart. It is a filtered seasonal chart that exclusively takes into account post-election year prices.

It shows the average returns generated in the past 30 post-election years. The horizontal axis shows the time of the year, while the vertical axis shows the level of the seasonal index. Thus one can see at a glance how post-election years typically play out.

Dow Jones, typical pattern of post-election years, 1901 to 2017

Dow Jones - seasonal chart 121 years

After a weak start, stocks rally until the beginning of August.
Source: Seasonax

As the chart illustrates, share prices basically tend to move sideways in the first three and a half months. However, from mid-April to early August a solid uptrend typically tends to take hold in post-election years. Thereafter fairly pronounced weakness emerges late in the summer, which is followed by a merely moderate rally at the end of the year.

Are there sound fundamental reasons for the typical pattern of the DJIA in the election cycle? If that is the case, it will increase the probability that the pattern can be profitably exploited.

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