WEBVTT - Jeff Hirsch on Presidential Market Cycles

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>New year, new president, new policies. What can we expect

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<v Speaker 2>when a new president takes over the White House. I'm

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<v Speaker 2>Barry Ritholtz, and on today's edition of At the Money,

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<v Speaker 2>we're going to discuss how presidential cycles affect markets and equities.

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<v Speaker 2>To help us understand all of this and its implications

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<v Speaker 2>for your portfolio, let's bring in Jeff Hirsch. He's editor

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<v Speaker 2>in chief of the Stock's Almanaccents May two thousand and three,

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<v Speaker 2>and in twenty eleven he was the author of the

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<v Speaker 2>book Super Boom, Why the Dow Jones will hit thirty

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<v Speaker 2>nine thousand, and How you Can profit from it. Full disclosure,

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<v Speaker 2>I wrote the forward to that book. So let's jump

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<v Speaker 2>right into the presidential cycle theory. Your father, Yalehirsh, developed

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<v Speaker 2>this concept in nineteen sixty seven. Explain his theory.

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<v Speaker 3>Yeah, Yale really put the presidential cycle the fuer cycle

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<v Speaker 3>on Wall Street's map when he've published a first almanac

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<v Speaker 3>back in sixty seven. Bottom line, it's about presidents trying

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<v Speaker 3>to get reelected. They try to make voters happy. Uh,

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<v Speaker 3>prime the pump in the third year. We've got a

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<v Speaker 3>whole page on how the government manipulates the economy. Most recently,

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<v Speaker 3>the twenty twenty three Startschriter's Almanac, and they really try

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<v Speaker 3>to prop it up in the third year, and they

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<v Speaker 3>take care of their least savory policy initiatives and agenda

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<v Speaker 3>items in the first two years. I think what we've

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<v Speaker 3>seen recently with Trump two point zero on day one,

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<v Speaker 3>et cetera, as a case in point of that, trying

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<v Speaker 3>to get a lot of stuff done. Foreign adversaries tend

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<v Speaker 3>to test new administrations early on. Ukraine in twenty two

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<v Speaker 3>is a good example of that, and it sort of

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<v Speaker 3>creates this tendency for bear markets in the midterm year

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<v Speaker 3>and that sweet spot of the four year cycle, the

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<v Speaker 3>Q four of midterm year to Q two pre election year,

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<v Speaker 3>and if you remember, October twenty two is pretty much

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<v Speaker 3>a textbook midterm class at October bottom.

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<v Speaker 2>So nineteen sixty seven seems like a long time, different economy,

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<v Speaker 2>different market, different credit cycle. How has the theory evolved

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<v Speaker 2>since let's call it fifty seven years ago.

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<v Speaker 3>Yeah, well, I mean the first two years have been

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<v Speaker 3>notoriously weak. I think the biggest change has been post

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<v Speaker 3>election years, which is what we're in right now A

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<v Speaker 3>twenty five have gotten much better. It seems to be

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<v Speaker 3>sort of the same, you know, priming of the pump

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<v Speaker 3>ahead of the midterm cycle now where they're trying to

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<v Speaker 3>hang on to it as many congressional seats as possible.

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<v Speaker 3>So post election years have improved dramatically since World War Two,

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<v Speaker 3>actually more dramatically since nineteen eighty five, with now averaging

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<v Speaker 3>seventeen point two percent in post election years eight up,

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<v Speaker 3>two down, best average gain in the four year cycle,

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<v Speaker 3>besting the pre election year, which you know is the

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<v Speaker 3>best over the longer term at fifteen point two percent.

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<v Speaker 4>But the pre.

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<v Speaker 3>Election year only has one loss, even though the average

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<v Speaker 3>is a little bit lower.

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<v Speaker 4>So it's pretty bullish for twenty twenty five for me,

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<v Speaker 4>you know, I'm looking at an up year.

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<v Speaker 3>Eight to twelve percent is my base case, with some

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<v Speaker 3>pullbacks in Q one and Q two, but you know,

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<v Speaker 3>not the twenty plus percent we've had the past couple

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<v Speaker 3>of years.

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<v Speaker 2>So I think back since this theory came out in

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<v Speaker 2>sixty seven, Nixon, Ford, ever, so briefly Carter Reagan, Bush,

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<v Speaker 2>Clinton for two terms, Bush two for two terms, Obama

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<v Speaker 2>for two terms, Trump, Biden, and then Trump again how

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<v Speaker 2>has the p finential cycle theory held up over all

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<v Speaker 2>those different presidents?

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<v Speaker 3>Pretty good in general, except for the nineties. You know,

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<v Speaker 3>the dot com boom pretty.

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<v Speaker 4>Much straight up during the late nineties. But there have

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<v Speaker 4>been some derailments.

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<v Speaker 3>I mean a lot of this is on page one

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<v Speaker 3>thirty of your Handy Stock Traders Nomanact, the whole four

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<v Speaker 3>year cycle, which I always keep in my desk you

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<v Speaker 3>can refer to yourself. There's been some derailments. It's not perfect,

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<v Speaker 3>you know, As I said, we had the Super Bowl

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<v Speaker 3>in the nineties. In the two thousand, COVID was that

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<v Speaker 3>sort of big oversold by there was? It still a

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<v Speaker 3>good year. The last cycle, which I just you know

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<v Speaker 3>reset for subscribers twenty twenty one to twenty four was

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<v Speaker 3>pretty textbook. So, you know, not perfect, but it works

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<v Speaker 3>pretty damn well over the long haul.

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<v Speaker 2>So let's talk about the strongest year tends to be

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<v Speaker 2>the third year of presidential terms. Historically, the kick out

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<v Speaker 2>all the stops, everything they could do in year three

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<v Speaker 2>tease them up for the election year, regardless of whether

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<v Speaker 2>it's them running for reelection or their party. They really

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<v Speaker 2>tend to send this hire and as you mentioned in

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<v Speaker 2>twenty twenty four plus twenty five percent is a monster year.

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<v Speaker 2>Hold aside how the incumbent party loses with the economy

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<v Speaker 2>up as much as it was in the stock market

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<v Speaker 2>up that much. But what are the factors that drive

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<v Speaker 2>this pattern. It's been the most consistent part of the cycle.

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<v Speaker 2>The third year almost always seems to do really well.

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<v Speaker 3>I mean, you got to repeat what we just said.

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<v Speaker 3>I mean, it's prime of the pump. It's how the

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<v Speaker 3>government government, it relates to communist stay in power. There's

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<v Speaker 3>a whole list of items with changing Social Security payments.

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<v Speaker 3>I mean, even in New York State, you're a New

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<v Speaker 3>York State rep. You got a check from Kathy Hochel

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<v Speaker 3>just ahead of the election.

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<v Speaker 4>I mean it it's down to the governor's level. They're

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<v Speaker 4>not even trying to hide it anymore.

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<v Speaker 3>It's just, you know, they're doing everything they can to

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<v Speaker 3>secure their legacy, to retain power for themselves, their party,

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<v Speaker 3>to make voters happy going into the booths.

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<v Speaker 4>And that's what creates that.

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<v Speaker 3>They got to do it ahead of time because they're

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<v Speaker 3>gonna be campaigning in the election year, so they got

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<v Speaker 3>to do a lot of these things to prime that pump.

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<v Speaker 3>In the pre election year, and that's the most consistent

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<v Speaker 3>part of it. I mean, it really sets up that

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<v Speaker 3>sweet spot that we talk about.

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<v Speaker 2>Plus it does take a little while for things like

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<v Speaker 2>fiscal spending and tax cuts to make its way through

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<v Speaker 2>the economy. If the third year is the strongest, what's

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<v Speaker 2>historically the weakest year and what are the factors that

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<v Speaker 2>hold that back?

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<v Speaker 3>It's the midterm year, the second year, the second year, sorry,

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<v Speaker 3>we call them post mid and pre that's Yales, Yale's

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<v Speaker 3>elder mccagy.

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<v Speaker 4>Yeah, second year.

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<v Speaker 3>I mean, we had we were all over this in

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<v Speaker 3>twenty twenty two. Putin invading Ukraine helped. I think part

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<v Speaker 3>of the reason that he went in was because of

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<v Speaker 3>the timing of the cycle where he knows and for

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<v Speaker 3>other foreign adversaries know that there's there's there's.

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<v Speaker 4>A vulnerability there in America.

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<v Speaker 3>But it's it's the midterm year, and that you can

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<v Speaker 3>see it on our charts. We do the four year

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<v Speaker 3>cycle UH breakdown by quarters. The weak spot is Q

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<v Speaker 3>two and Q three. The midterm year dows down on

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<v Speaker 3>an average two percent s and P two and a

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<v Speaker 3>half NASDAK minus six point six, and that sets up

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<v Speaker 3>that sweet spot.

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<v Speaker 2>Huh. Really interesting. Any difference in the historical data between

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<v Speaker 2>let's say a president has two terms between the four

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<v Speaker 2>year cycle of term one and the four year cycle

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<v Speaker 2>of term two, or does it not matter.

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<v Speaker 4>It's a little bit better, not not much term two

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<v Speaker 4>in term two.

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<v Speaker 2>The assumption being, Hey, if the economy is good enough

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<v Speaker 2>for them to get re elected, then everything should be firing.

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<v Speaker 3>Yeah, especially in that post election year, the fifth year

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<v Speaker 3>of a presidency. You know, they've got more of a mandate.

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<v Speaker 3>You know, we've seen you know, on average about nine

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<v Speaker 3>point seven percent for the S ANDP in those fifth

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<v Speaker 3>years versus what it's about, you know, all years about

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<v Speaker 3>nine and a half percent of the all post lectures

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<v Speaker 3>a little bit lower than that, but it's been a lot.

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<v Speaker 4>Better in recent history.

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<v Speaker 3>You know, you go back to you know, nineteen seventeen,

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<v Speaker 3>nineteen thirty seven, fifty seven, seventy three, all week years

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<v Speaker 3>in that fifth year, but since since eighty five, you know,

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<v Speaker 3>post lecture years fifth years are great.

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<v Speaker 2>Here's a totally random question, and I know there's no

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<v Speaker 2>real good answer to this. Does it matter if the

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<v Speaker 2>presidential terms are non consecutive? I know we have now

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<v Speaker 2>a data set of one before this, maybe maybe one.

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<v Speaker 3>I mean eighteen ninety three, we had the Panic eight

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<v Speaker 3>to ninety three, the depression from eighteen eighty three to

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<v Speaker 3>nineteen ninety seven, we had what was there even indoor

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<v Speaker 3>plumbing everywhere back then.

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<v Speaker 4>I don't think.

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<v Speaker 2>Not exactly the same market, No.

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<v Speaker 4>Not exactly the same world. I mean from Fiddler, it's

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<v Speaker 4>a new world guildough.

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<v Speaker 3>You know, I mean, it's much different, but it's still

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<v Speaker 3>all about building their legacy, keeping the party in power,

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<v Speaker 3>and a little bit of ego involved there. But it's

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<v Speaker 3>trying to make things look as great as possible for

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<v Speaker 3>their party and their and their legacy.

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<v Speaker 2>So it's funny we're talking about eighteen ninety three. It

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<v Speaker 2>feels like America today is more partisan and more polarized

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<v Speaker 2>than it's been certainly in our lifetimes. Does that have

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<v Speaker 2>any impact on the presidential cycle.

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<v Speaker 3>I don't think so. I'm not sure if it's if

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<v Speaker 3>it's perception. You know, we know each other a long time.

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<v Speaker 3>We know a lot of the same people in the business.

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<v Speaker 3>I have a lot of friends from different points of view.

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<v Speaker 3>There's people in the business different point of view, but

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<v Speaker 3>when we talk about things, there's a lot more in

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<v Speaker 3>common than different, even with the people on different ideology

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<v Speaker 3>and different political points of view. So, if anything, I

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<v Speaker 3>think it might amplify the four year cycle because it's

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<v Speaker 3>more incumbent upon the incumbents pardon the alliteration there to

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<v Speaker 3>to retain power and to try to keep their party

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<v Speaker 3>in Congress. And I think it could really amplify it.

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<v Speaker 2>So you're a data wonk. You've been going through the

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<v Speaker 2>Stock Traders Almanac for your whole career. You're always looking

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<v Speaker 2>at all these fascinating numbers and market data. What's been

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<v Speaker 2>the biggest surprise or anomaly you've observed in presidential market cycles.

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<v Speaker 4>First of all, I grew up doing this.

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<v Speaker 3>I mean I took over the editorship, you know in

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<v Speaker 3>O three I think is the where you mentioned it.

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<v Speaker 3>But you know, I grew up running these numbers by

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<v Speaker 3>hand and at a baron, so a little ruler and

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<v Speaker 3>a red pen and you know, an aiding machining graph

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<v Speaker 3>paper with a pencil. The biggest surprise, I think is

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<v Speaker 3>this the record of the Dow in pre election years

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<v Speaker 3>of no losses since nineteen thirty nine until twenty fifteen,

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<v Speaker 3>so from forty three to twenty three in post election

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<v Speaker 3>years excuse me, pre election years. The Dow is twenty

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<v Speaker 3>and one.

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<v Speaker 4>Wow.

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<v Speaker 3>And then the other thing with the four year cycle.

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<v Speaker 3>There's a couple other discoveries of the things we made,

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<v Speaker 3>but for the four year cycle. This thing I mentioned

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<v Speaker 3>earlier was the post election year flipping from being the

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<v Speaker 3>worst you know, in the big history in the back

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<v Speaker 3>of the almanac, like I mentioned, to being the best

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<v Speaker 3>in s eighty five.

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<v Speaker 2>So why do you think that is the first year

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<v Speaker 2>slump just hasn't materialized since really since the financial crisis.

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<v Speaker 2>Are we blaming accrediting low interest rates in the FED

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<v Speaker 2>for this or is it something else?

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<v Speaker 3>I think it has something to do with the compression

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<v Speaker 3>of the cycle that I've talked about, you know, where

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<v Speaker 3>midterms have become much more important to hang on to

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<v Speaker 3>the slim margins we've seen in recent years, and you

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<v Speaker 3>kind of have that almost you know, second pre election year,

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<v Speaker 3>the post election year, or the first year of the

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<v Speaker 3>term is really the pre midterm election year where they've

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<v Speaker 3>got to do stuff to make voters happy so that

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<v Speaker 3>they can keep their party in Congress as well or

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<v Speaker 3>win back some seats, whatever it might be at the time.

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<v Speaker 2>So our final question, how should investors think about their

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<v Speaker 2>investment postures relative to presidential cycles.

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<v Speaker 3>Well, you know, we have a strategy where we use

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<v Speaker 3>the seasonality the best and worst months in conjunction with

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<v Speaker 3>the four year cycle.

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<v Speaker 4>We basically stay in from.

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<v Speaker 3>The mid term low you know, the midterm bicycle in

0:12:29.360 --> 0:12:32.360
<v Speaker 3>October through the post election year April May.

0:12:32.440 --> 0:12:35.520
<v Speaker 4>So basically you want to avoid the week spots. Q

0:12:35.600 --> 0:12:36.960
<v Speaker 4>one post election year.

0:12:37.080 --> 0:12:39.440
<v Speaker 3>Q one first year is one of the weak spots,

0:12:39.480 --> 0:12:41.079
<v Speaker 3>not quite as bad, but the real one I mentioned

0:12:41.120 --> 0:12:43.880
<v Speaker 3>before Q two and Q three the midterm year, and

0:12:43.920 --> 0:12:46.120
<v Speaker 3>you want to back up the truck for the sweet

0:12:46.160 --> 0:12:50.120
<v Speaker 3>spot for that you know October by in the midterm

0:12:50.200 --> 0:12:52.319
<v Speaker 3>year like we had in the classic one we had

0:12:52.320 --> 0:12:54.560
<v Speaker 3>in twenty two. And I think you want to you know,

0:12:54.720 --> 0:12:58.400
<v Speaker 3>be leary of you know, getting in and out at

0:12:58.600 --> 0:13:01.719
<v Speaker 3>times when the cycles troughing or peaking, just like you

0:13:01.760 --> 0:13:05.320
<v Speaker 3>would do with the seasonal cycle. So basically you want

0:13:05.320 --> 0:13:09.640
<v Speaker 3>to be long Q four midterm year through the post

0:13:09.640 --> 0:13:10.960
<v Speaker 3>election year first quarter.

0:13:10.760 --> 0:13:13.120
<v Speaker 4>And sort of be more cautious in those two years.

0:13:13.559 --> 0:13:16.800
<v Speaker 2>So to wrap up, investors with a long term perspective

0:13:17.360 --> 0:13:21.760
<v Speaker 2>should prepare themselves for a little bit of softening following

0:13:21.760 --> 0:13:25.720
<v Speaker 2>the first quarter of a new presidential term, maybe at

0:13:25.800 --> 0:13:30.120
<v Speaker 2>lasts four quarter six quarters. Historically it's a little weaker

0:13:30.160 --> 0:13:33.000
<v Speaker 2>than the rest of the cycle. When it makes that low,

0:13:33.040 --> 0:13:36.560
<v Speaker 2>whether that's the summer or October of the midterm year,

0:13:37.040 --> 0:13:41.320
<v Speaker 2>that's what tees you up for really the best historical

0:13:41.360 --> 0:13:47.360
<v Speaker 2>returns within a new presidency. So strap yourself in. Could

0:13:47.360 --> 0:13:50.160
<v Speaker 2>get a little shaky for the next couple of quarters,

0:13:50.480 --> 0:13:53.720
<v Speaker 2>but the payoff for that is from the midterm cycle

0:13:54.080 --> 0:13:58.040
<v Speaker 2>through the last year of the presidency. I'm Barry Dults.

0:13:58.120 --> 0:13:59.960
<v Speaker 2>This is Bloomberg's at the moment.

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<v Speaker 1>Bad h