Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: New year, new president, new policies. What can we expect
Speaker 2: when a new president takes over the White House. I'm
Speaker 2: Barry Ritholtz, and on today's edition of At the Money,
Speaker 2: we're going to discuss how presidential cycles affect markets and equities.
Speaker 2: To help us understand all of this and its implications
Speaker 2: for your portfolio, let's bring in Jeff Hirsch. He's editor
Speaker 2: in chief of the Stock's Almanaccents May two thousand and three,
Speaker 2: and in twenty eleven he was the author of the
Speaker 2: book Super Boom, Why the Dow Jones will hit thirty
Speaker 2: nine thousand, and How you Can profit from it. Full disclosure,
Speaker 2: I wrote the forward to that book. So let's jump
Speaker 2: right into the presidential cycle theory. Your father, Yalehirsh, developed
Speaker 2: this concept in nineteen sixty seven. Explain his theory.
Speaker 3: Yeah, Yale really put the presidential cycle the fuer cycle
Speaker 3: on Wall Street's map when he've published a first almanac
Speaker 3: back in sixty seven. Bottom line, it's about presidents trying
Speaker 3: to get reelected. They try to make voters happy. Uh,
Speaker 3: prime the pump in the third year. We've got a
Speaker 3: whole page on how the government manipulates the economy. Most recently,
Speaker 3: the twenty twenty three Startschriter's Almanac, and they really try
Speaker 3: to prop it up in the third year, and they
Speaker 3: take care of their least savory policy initiatives and agenda
Speaker 3: items in the first two years. I think what we've
Speaker 3: seen recently with Trump two point zero on day one,
Speaker 3: et cetera, as a case in point of that, trying
Speaker 3: to get a lot of stuff done. Foreign adversaries tend
Speaker 3: to test new administrations early on. Ukraine in twenty two
Speaker 3: is a good example of that, and it sort of
Speaker 3: creates this tendency for bear markets in the midterm year
Speaker 3: and that sweet spot of the four year cycle, the
Speaker 3: Q four of midterm year to Q two pre election year,
Speaker 3: and if you remember, October twenty two is pretty much
Speaker 3: a textbook midterm class at October bottom.
Speaker 2: So nineteen sixty seven seems like a long time, different economy,
Speaker 2: different market, different credit cycle. How has the theory evolved
Speaker 2: since let's call it fifty seven years ago.
Speaker 3: Yeah, well, I mean the first two years have been
Speaker 3: notoriously weak. I think the biggest change has been post
Speaker 3: election years, which is what we're in right now A
Speaker 3: twenty five have gotten much better. It seems to be
Speaker 3: sort of the same, you know, priming of the pump
Speaker 3: ahead of the midterm cycle now where they're trying to
Speaker 3: hang on to it as many congressional seats as possible.
Speaker 3: So post election years have improved dramatically since World War Two,
Speaker 3: actually more dramatically since nineteen eighty five, with now averaging
Speaker 3: seventeen point two percent in post election years eight up,
Speaker 3: two down, best average gain in the four year cycle,
Speaker 3: besting the pre election year, which you know is the
Speaker 3: best over the longer term at fifteen point two percent.
Speaker 4: But the pre.
Speaker 3: Election year only has one loss, even though the average
Speaker 3: is a little bit lower.
Speaker 4: So it's pretty bullish for twenty twenty five for me,
Speaker 4: you know, I'm looking at an up year.
Speaker 3: Eight to twelve percent is my base case, with some
Speaker 3: pullbacks in Q one and Q two, but you know,
Speaker 3: not the twenty plus percent we've had the past couple
Speaker 3: of years.
Speaker 2: So I think back since this theory came out in
Speaker 2: sixty seven, Nixon, Ford, ever, so briefly Carter Reagan, Bush,
Speaker 2: Clinton for two terms, Bush two for two terms, Obama
Speaker 2: for two terms, Trump, Biden, and then Trump again how
Speaker 2: has the p finential cycle theory held up over all
Speaker 2: those different presidents?
Speaker 3: Pretty good in general, except for the nineties. You know,
Speaker 3: the dot com boom pretty.
Speaker 4: Much straight up during the late nineties. But there have
Speaker 4: been some derailments.
Speaker 3: I mean a lot of this is on page one
Speaker 3: thirty of your Handy Stock Traders Nomanact, the whole four
Speaker 3: year cycle, which I always keep in my desk you
Speaker 3: can refer to yourself. There's been some derailments. It's not perfect,
Speaker 3: you know, As I said, we had the Super Bowl
Speaker 3: in the nineties. In the two thousand, COVID was that
Speaker 3: sort of big oversold by there was? It still a
Speaker 3: good year. The last cycle, which I just you know
Speaker 3: reset for subscribers twenty twenty one to twenty four was
Speaker 3: pretty textbook. So, you know, not perfect, but it works
Speaker 3: pretty damn well over the long haul.
Speaker 2: So let's talk about the strongest year tends to be
Speaker 2: the third year of presidential terms. Historically, the kick out
Speaker 2: all the stops, everything they could do in year three
Speaker 2: tease them up for the election year, regardless of whether
Speaker 2: it's them running for reelection or their party. They really
Speaker 2: tend to send this hire and as you mentioned in
Speaker 2: twenty twenty four plus twenty five percent is a monster year.
Speaker 2: Hold aside how the incumbent party loses with the economy
Speaker 2: up as much as it was in the stock market
Speaker 2: up that much. But what are the factors that drive
Speaker 2: this pattern. It's been the most consistent part of the cycle.
Speaker 2: The third year almost always seems to do really well.
Speaker 3: I mean, you got to repeat what we just said.
Speaker 3: I mean, it's prime of the pump. It's how the
Speaker 3: government government, it relates to communist stay in power. There's
Speaker 3: a whole list of items with changing Social Security payments.
Speaker 3: I mean, even in New York State, you're a New
Speaker 3: York State rep. You got a check from Kathy Hochel
Speaker 3: just ahead of the election.
Speaker 4: I mean it it's down to the governor's level. They're
Speaker 4: not even trying to hide it anymore.
Speaker 3: It's just, you know, they're doing everything they can to
Speaker 3: secure their legacy, to retain power for themselves, their party,
Speaker 3: to make voters happy going into the booths.
Speaker 4: And that's what creates that.
Speaker 3: They got to do it ahead of time because they're
Speaker 3: gonna be campaigning in the election year, so they got
Speaker 3: to do a lot of these things to prime that pump.
Speaker 3: In the pre election year, and that's the most consistent
Speaker 3: part of it. I mean, it really sets up that
Speaker 3: sweet spot that we talk about.
Speaker 2: Plus it does take a little while for things like
Speaker 2: fiscal spending and tax cuts to make its way through
Speaker 2: the economy. If the third year is the strongest, what's
Speaker 2: historically the weakest year and what are the factors that
Speaker 2: hold that back?
Speaker 3: It's the midterm year, the second year, the second year, sorry,
Speaker 3: we call them post mid and pre that's Yales, Yale's
Speaker 3: elder mccagy.
Speaker 4: Yeah, second year.
Speaker 3: I mean, we had we were all over this in
Speaker 3: twenty twenty two. Putin invading Ukraine helped. I think part
Speaker 3: of the reason that he went in was because of
Speaker 3: the timing of the cycle where he knows and for
Speaker 3: other foreign adversaries know that there's there's there's.
Speaker 4: A vulnerability there in America.
Speaker 3: But it's it's the midterm year, and that you can
Speaker 3: see it on our charts. We do the four year
Speaker 3: cycle UH breakdown by quarters. The weak spot is Q
Speaker 3: two and Q three. The midterm year dows down on
Speaker 3: an average two percent s and P two and a
Speaker 3: half NASDAK minus six point six, and that sets up
Speaker 3: that sweet spot.
Speaker 2: Huh. Really interesting. Any difference in the historical data between
Speaker 2: let's say a president has two terms between the four
Speaker 2: year cycle of term one and the four year cycle
Speaker 2: of term two, or does it not matter.
Speaker 4: It's a little bit better, not not much term two
Speaker 4: in term two.
Speaker 2: The assumption being, Hey, if the economy is good enough
Speaker 2: for them to get re elected, then everything should be firing.
Speaker 3: Yeah, especially in that post election year, the fifth year
Speaker 3: of a presidency. You know, they've got more of a mandate.
Speaker 3: You know, we've seen you know, on average about nine
Speaker 3: point seven percent for the S ANDP in those fifth
Speaker 3: years versus what it's about, you know, all years about
Speaker 3: nine and a half percent of the all post lectures
Speaker 3: a little bit lower than that, but it's been a lot.
Speaker 4: Better in recent history.
Speaker 3: You know, you go back to you know, nineteen seventeen,
Speaker 3: nineteen thirty seven, fifty seven, seventy three, all week years
Speaker 3: in that fifth year, but since since eighty five, you know,
Speaker 3: post lecture years fifth years are great.
Speaker 2: Here's a totally random question, and I know there's no
Speaker 2: real good answer to this. Does it matter if the
Speaker 2: presidential terms are non consecutive? I know we have now
Speaker 2: a data set of one before this, maybe maybe one.
Speaker 3: I mean eighteen ninety three, we had the Panic eight
Speaker 3: to ninety three, the depression from eighteen eighty three to
Speaker 3: nineteen ninety seven, we had what was there even indoor
Speaker 3: plumbing everywhere back then.
Speaker 4: I don't think.
Speaker 2: Not exactly the same market, No.
Speaker 4: Not exactly the same world. I mean from Fiddler, it's
Speaker 4: a new world guildough.
Speaker 3: You know, I mean, it's much different, but it's still
Speaker 3: all about building their legacy, keeping the party in power,
Speaker 3: and a little bit of ego involved there. But it's
Speaker 3: trying to make things look as great as possible for
Speaker 3: their party and their and their legacy.
Speaker 2: So it's funny we're talking about eighteen ninety three. It
Speaker 2: feels like America today is more partisan and more polarized
Speaker 2: than it's been certainly in our lifetimes. Does that have
Speaker 2: any impact on the presidential cycle.
Speaker 3: I don't think so. I'm not sure if it's if
Speaker 3: it's perception. You know, we know each other a long time.
Speaker 3: We know a lot of the same people in the business.
Speaker 3: I have a lot of friends from different points of view.
Speaker 3: There's people in the business different point of view, but
Speaker 3: when we talk about things, there's a lot more in
Speaker 3: common than different, even with the people on different ideology
Speaker 3: and different political points of view. So, if anything, I
Speaker 3: think it might amplify the four year cycle because it's
Speaker 3: more incumbent upon the incumbents pardon the alliteration there to
Speaker 3: to retain power and to try to keep their party
Speaker 3: in Congress. And I think it could really amplify it.
Speaker 2: So you're a data wonk. You've been going through the
Speaker 2: Stock Traders Almanac for your whole career. You're always looking
Speaker 2: at all these fascinating numbers and market data. What's been
Speaker 2: the biggest surprise or anomaly you've observed in presidential market cycles.
Speaker 4: First of all, I grew up doing this.
Speaker 3: I mean I took over the editorship, you know in
Speaker 3: O three I think is the where you mentioned it.
Speaker 3: But you know, I grew up running these numbers by
Speaker 3: hand and at a baron, so a little ruler and
Speaker 3: a red pen and you know, an aiding machining graph
Speaker 3: paper with a pencil. The biggest surprise, I think is
Speaker 3: this the record of the Dow in pre election years
Speaker 3: of no losses since nineteen thirty nine until twenty fifteen,
Speaker 3: so from forty three to twenty three in post election
Speaker 3: years excuse me, pre election years. The Dow is twenty
Speaker 3: and one.
Speaker 4: Wow.
Speaker 3: And then the other thing with the four year cycle.
Speaker 3: There's a couple other discoveries of the things we made,
Speaker 3: but for the four year cycle. This thing I mentioned
Speaker 3: earlier was the post election year flipping from being the
Speaker 3: worst you know, in the big history in the back
Speaker 3: of the almanac, like I mentioned, to being the best
Speaker 3: in s eighty five.
Speaker 2: So why do you think that is the first year
Speaker 2: slump just hasn't materialized since really since the financial crisis.
Speaker 2: Are we blaming accrediting low interest rates in the FED
Speaker 2: for this or is it something else?
Speaker 3: I think it has something to do with the compression
Speaker 3: of the cycle that I've talked about, you know, where
Speaker 3: midterms have become much more important to hang on to
Speaker 3: the slim margins we've seen in recent years, and you
Speaker 3: kind of have that almost you know, second pre election year,
Speaker 3: the post election year, or the first year of the
Speaker 3: term is really the pre midterm election year where they've
Speaker 3: got to do stuff to make voters happy so that
Speaker 3: they can keep their party in Congress as well or
Speaker 3: win back some seats, whatever it might be at the time.
Speaker 2: So our final question, how should investors think about their
Speaker 2: investment postures relative to presidential cycles.
Speaker 3: Well, you know, we have a strategy where we use
Speaker 3: the seasonality the best and worst months in conjunction with
Speaker 3: the four year cycle.
Speaker 4: We basically stay in from.
Speaker 3: The mid term low you know, the midterm bicycle in
Speaker 3: October through the post election year April May.
Speaker 4: So basically you want to avoid the week spots. Q
Speaker 4: one post election year.
Speaker 3: Q one first year is one of the weak spots,
Speaker 3: not quite as bad, but the real one I mentioned
Speaker 3: before Q two and Q three the midterm year, and
Speaker 3: you want to back up the truck for the sweet
Speaker 3: spot for that you know October by in the midterm
Speaker 3: year like we had in the classic one we had
Speaker 3: in twenty two. And I think you want to you know,
Speaker 3: be leary of you know, getting in and out at
Speaker 3: times when the cycles troughing or peaking, just like you
Speaker 3: would do with the seasonal cycle. So basically you want
Speaker 3: to be long Q four midterm year through the post
Speaker 3: election year first quarter.
Speaker 4: And sort of be more cautious in those two years.
Speaker 2: So to wrap up, investors with a long term perspective
Speaker 2: should prepare themselves for a little bit of softening following
Speaker 2: the first quarter of a new presidential term, maybe at
Speaker 2: lasts four quarter six quarters. Historically it's a little weaker
Speaker 2: than the rest of the cycle. When it makes that low,
Speaker 2: whether that's the summer or October of the midterm year,
Speaker 2: that's what tees you up for really the best historical
Speaker 2: returns within a new presidency. So strap yourself in. Could
Speaker 2: get a little shaky for the next couple of quarters,
Speaker 2: but the payoff for that is from the midterm cycle
Speaker 2: through the last year of the presidency. I'm Barry Dults.
Speaker 2: This is Bloomberg's at the moment.
Speaker 1: Bad h