Masters in Business: Jeff Hirsch on Presidential Market Cycles

Bloomberg’s “Masters in Business” podcast features insightful discussions with key figures shaping the business and investment landscape. In the January 29, 2025 episode titled “Jeff Hirsch on Presidential Market Cycles,” host Barry Ritholtz delves into the intricacies of how presidential terms influence market behaviors. Jeff Hirsch, Editor-in-Chief of the Stock Traders Almanac and author of “Super Boom,” shares his expertise on the enduring presidential cycle theory and its implications for investors.

Introduction to Presidential Cycle Theory

Barry Ritholtz opens the discussion by introducing the concept of presidential cycles and their impact on markets. He references Yale Hirsch’s development of the four-year presidential cycle in 1967, which maps out how different phases of a presidency affect economic and market performance.

Jeff Hirsch [02:28]: "Yale really put the presidential cycle, the Four Year Cycle, on Wall Street's map when he published the first almanac back in '67."

Evolution of the Theory Over Decades

Jeff Hirsch elaborates on the origins and evolution of the presidential cycle theory, highlighting its foundational premise: presidents, aiming for reelection, attempt to influence economic conditions to favor their party.

Jeff Hirsch [02:28]: "It's about presidents trying to get reelected. They try to make voters happy, prime the pump in the third year..."

Hirsch notes that while the basic framework has remained consistent, several factors have influenced its application over the decades, particularly in post-election years.

Jeff Hirsch [03:44]: "The biggest change has been post-election years, which is what we're in right now. 25 have gotten much better."

Historical Performance Under Various Administrations

Ritholtz queries the theory’s robustness across different presidents, from Nixon to Biden and beyond. Hirsch acknowledges certain anomalies but affirms the general reliability of the cycle.

Jeff Hirsch [05:06]: "Pretty good in general, except for the '90s, you know, the dot-com boom pretty much straight up during the late '90s."

He references the Stock Traders Almanac’s detailed analysis, noting that while the theory isn't flawless, it has shown remarkable consistency over time.

Understanding the Strongest Year: The Third Year of the Term

A significant portion of the discussion focuses on why the third year of a presidential term typically sees robust market performance. Hirsch attributes this to deliberate government actions aimed at bolstering the economy to secure reelection.

Jeff Hirsch [06:39]: "It's how the government manipulates the economy to stay in power... they're doing everything they can to secure their legacy."

This "prime of the pump" strategy involves fiscal policies, Social Security adjustments, and other measures designed to create favorable economic conditions.

Identifying the Weakest Year: The Midterm Year

Conversely, the midterm year is traditionally the weakest in the cycle, often marked by bear markets. Hirsch explains this dip as a result of external factors and the inherent vulnerabilities during this phase.

Jeff Hirsch [07:40]: "It's the midterm year, the second year... Putin invading Ukraine helped. I think part of the reason that he went in was because of the timing of the cycle..."

Historical data shows consistent downturns in the midterm years, with notable drops in major indices like the Dow, S&P 500, and NASDAQ during this period.

Impact of Non-Consecutive Terms and Political Polarization

Ritholtz brings up the rare instance of non-consecutive presidential terms and the increasing political polarization in America. Hirsch speculates on potential effects, suggesting that heightened partisanship might amplify the existing cycle patterns.

Jeff Hirsch [10:40]: "I don't think [polarization] does...[But] it's more incumbent upon the incumbents... I think it could really amplify it."

However, he notes the limited historical data on non-consecutive terms makes definitive conclusions challenging.

Surprises and Anomalies in the Presidential Cycle Data

Hirsch shares intriguing anomalies observed during his extensive research, such as the absence of Dow losses in pre-election years from 1939 until 2015 and the transformation of post-election years from being historically weak to some of the strongest periods since 1985.

Jeff Hirsch [11:39]: "The Dow is 20 and 1 [pre-election years]."

He attributes these shifts to changes in political strategies and economic management, especially post-1985, which have altered the traditional cycle dynamics.

Investment Strategies Based on Presidential Cycles

Concluding the discussion, Hirsch provides actionable strategies for investors seeking to leverage the presidential cycle. He recommends aligning investment decisions with the cycle’s phases, emphasizing periods of strength and caution during anticipated downturns.

Jeff Hirsch [13:17]: "We basically stay in from the midterm low, you know, the midterm buy signal, October through the post-election year, April, May."

He advises investors to be vigilant during weak spots like Q1 post-election year and to capitalize on the "sweet spot" from the midterm buy-in through the final quarters of the presidency.

Conclusion and Key Takeaways

Barry Ritholtz wraps up by summarizing the core insights from Jeff Hirsch, highlighting the actionable nature of the presidential cycle theory for long-term investors. He underscores the importance of preparing for fluctuations in the early quarters of a new presidency while positioning for growth in the latter phases.

Barry Ritholtz [14:15]: "Investors with a long term perspective should prepare themselves for a little bit of softening following the first quarter of a new presidential term... the payoff for that is from the midterm cycle through the last year of the presidency."

Key Insights:

• Presidential Actions Influence Markets: Presidents actively shape economic policies to bolster their reelection chances, leading to predictable market behaviors.

• Strong Third Year: The penultimate year of a presidency typically sees significant market gains due to proactive economic strategies.

• Weak Midterm Year: The middle of the term often experiences market downturns, influenced by both internal policies and external factors like geopolitical events.

• Evolving Dynamics: Modern political strategies and increased partisanship may be intensifying traditional cycle patterns, though historical anomalies persist.

• Strategic Investment Timing: Aligning investment strategies with the presidential cycle can potentially enhance returns and mitigate risks.

This episode offers valuable perspectives for investors aiming to navigate the complexities of market cycles influenced by political leadership, providing both historical context and practical strategies for capitalizing on these patterns.