Jeff Hirsch on Presidential Market Cycles

Summary

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.

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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."

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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.

Transcript

[Barry Ritholtz]

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[Jeff Hirsch]

What if you do her and found a dead on the ground how can you run when we know.

[Barry Ritholtz]

New Year, new president, new policies? What can we expect when a new president takes over the White House? I'm Barry RITHOLTZ and on today's edition of @ the Money, we're going to discuss how presidential cycles affect markets and equities. To help us understand all of this, its implications for your portfolio, let's bring in Jeff Hirsch. He's editor in chief of the Stock Traders Almanac since May 2003, and in 2011 he was the author of the book Super Boom why the Dow Jones will hit 39,000 and how you can profit from it. Full disclosure, I wrote the forward to that book. So let's jump right into the presidential cycle theory. Your father, Yale Hirsch, developed this concept in 1967. Explain his theory.

[Jeff Hirsch]

Yeah, Yale really put the presidential cycle, the Four Year Cycle, on Wall Street's map when he published the first almanac back in 67. Bottom line, it's about presidents trying to get reelected. They try to make voters happy, prime the pump in the third year we've got a whole page on how the government manipulates the economy, Most recently, the 2023 Stock Traders Almanac. And they really try to prop it up in the third year and they take care of their least savory policy initiatives and agenda items in the first two years. I think what we've seen recently with Trump 2.0 on day one, et cetera, as a case in point of that, trying to get a lot of stuff done. Foreign adversaries tend to test new administrations early on. Ukraine in 22 is a good example of that. And it sort of creates this tendency for bear markets in the midterm year and that sweet spot of the four year cycle, the Q4 of midterm year to Q2 pre election year. And if you remember, October 22nd was pretty much a textbook midterm classic. October bottom.

[Barry Ritholtz]

So 1967 seems like a long time. Different economy, different market, different credit cycle. How has the theory evolved since let's call it 57 years ago?

[Jeff Hirsch]

Yeah, well, I mean the first two years have been notoriously weak. I think the biggest change has been post election years, which is what we're in right now. 25 have gotten much better. It seems to be sort of the same, you know, priming of the pump ahead of the midterm cycle now where they're trying to hang on to as many congressional seats as possible. So post election years have improved dramatically since World War II, more dramatically since 1985 with the Dow averaging 17.2% post election years. Eight up, two down. Best average gain of the four year cycle, besting the pre election year, which you know is the best over the longer term at 15.2%. But the pre election year only has one loss even though the average is a little bit lower. So it's pretty bullish for 2025. For me, you know, I'm looking at a, an up year. 8 to 12% is my base case with some pullbacks in Q1 and Q2, but you know, not the 20 plus percent we've had the past couple of years.

[Barry Ritholtz]

So I think back since this theory came out in 67, Nixon, Ford, ever so briefly, Carter, Reagan, Bush, Clinton for two terms, Bush two for two terms, Obama for two terms, Trump, Biden and then Trump again. How has the presidential cycle theory held up over all those different presidents?

[Jeff Hirsch]

Pretty good in general, except for the 90s, you know, the, the dot com boom pretty much straight up during the late 90s. But there have been some derailments. I mean a lot of this is on page 130 of your handy Stock Traders Almanac. The whole four year cycle, which you, I, I always keep on my desk, you can refer to yourself. There's been some derailments. It's not perfect. You know, as I said, we had the Superbowl in the 90s and the 2000 Covid was that sort of big oversold buy there. Was it still a good year? The last cycle, which I just reset for subscribers 2021-24 was pretty textbook. So not perfect, but it works pretty damn well over the long haul.

[Barry Ritholtz]

So let's talk about. The strongest year tends to be the third year of presidential terms. Historically they kick out all the stops. Everything they could do in year three tees them up for the election year. Regardless of whether it's them running for reelection or their party, they really tend to send this higher. And as you mentioned in 2024 plus 25% is a monster year. Hold aside how the incumbent party loses, with the economy up as much as it was in the stock market up that much. But what are the factors that drive this pattern? It's been the most consistent part of the cycle. The third year almost always seems to do really well.

[Jeff Hirsch]

I mean you gotta repeat what we just said. I mean it's prime of the pump. It's how the government manipulates the economy to stay in power. There's a whole list of items with changing Social Security payments. I mean even in New York State, you're a New York state rep, you gotta a check from, from Kathy Hochul just ahead of the election. I mean it's down to the governor's level. They're not even trying to hide it anymore. It's just, you know, they're doing everything they can to, to secure their legacy, to retain power for themselves, their party, to make voters happy going into the booth. And that's what creates that. They got to do it ahead of time because they're going to be campaigning in the election year. So they got to do a lot of these things to prime that pump in the pre election year. And that's the most consistent part of it. I mean it really sets up that sweet spot that we talk about.

[Barry Ritholtz]

Plus it does take a little while for things like fiscal spending and tax cuts to make its way through the economy. If the third year is the strongest, what's historically the weakest year and what are the factors that hold that back?

[Jeff Hirsch]

It's the midterm year, the second year. The second year, sorry, we call it post mid and pre. That's Yale's el nomenclature. Yeah, second year. I mean we were all over this in 2022. Putin invading Ukraine helped. I think part of the reason that he went in was because of the timing of the cycle where he knows and other foreign adversaries know that there's a vulnerability there in America. But it's the midterm year and that you can see it on our charts. We do the four year cycle breakdown by quarters. The weak spot is Q2 and Q3 of the midterm year. Dow's down on average 2% s and P 2.5, NASDAQ minus 6.6. And that sets up that sweet spot, huh?

[Barry Ritholtz]

Really interesting. Any difference in the historical data between, let's say a president has two terms between the four year cycle of term one and the four year cycle of term two, or does it not matter?

[Jeff Hirsch]

It's a little bit better. Not much.

[Barry Ritholtz]

Term two. In term two, the assumption being, hey, if the economy is good enough for them to get reelected, then everything should be firing.

[Jeff Hirsch]

Yeah, especially in that post election year, the fifth year of a presidency, you know, they've got more of a mandate. You know, we've seen, you know, an average about 9.7% for the S&P in those fifth years versus what it's about, you know, all years, about nine and a half percent of all post elections a little bit lower than that. But it's been a lot better in recent history. You know, you go back to, you know, 1917, 1937, 57, 73, all weak years in that fifth year. But since 85, you know, post election years, fifth years are great.

[Barry Ritholtz]

Here's a totally random question, and I know there's no real good answer to this. Does it matter if the presidential terms are non consecutive? I know we have now a data set of one before this.

[Jeff Hirsch]

Maybe, maybe one. I mean, 1893, we had the panic, 1893, the depression. From 1883 to 1997 we had what was there even indoor plumbing everywhere back then? I don't think so.

[Barry Ritholtz]

Not exactly the same market.

[Jeff Hirsch]

No, not exactly the same world. I mean, from Fiddler. It's a new world, Golda. You know, I mean, it's much different, but it's still all about building their legacy, keeping the party in power and a little bit of ego involved there. But it's trying to make things look as great as possible for their party and their legacy.

[Barry Ritholtz]

So it's funny, we're talking about 1893. It feels like America today is more partisan and more polarized than it's been certainly in our lifetimes. Does that have any impact on the presidential cycle?

[Jeff Hirsch]

I don't think so. I'm not sure if it's, if it's perception. You know, we know each other a long time. We know a lot of the same people in the business. I have a lot of friends from different points of view. There's people in the business, different points of view. But when we talk about things, there's a lot more in common than different, even with the people on different ideologies and different political points of view. So if anything, I Think it might amplify the four year cycle because it's more incumbent upon the incumbents, pardon the alliteration there, to retain power and to try to keep their party in Congress. And I think it could really amplify it.

[Barry Ritholtz]

So you're a data wonk. You've been going through the Stock Traders Almanac for your whole career. You're always looking at all these fascinating numbers and market data. What's been the biggest surprise or anomaly you've observed in presidential market cycles?

[Jeff Hirsch]

First of all, I grew up doing this. I mean I took over the editorship, you know, IN03 I think is the, where you mentioned it. But you know, I grew up running these numbers by hand at a baron's with a little ruler and a red pen and you know, an adding machine and graph paper with a pencil. The biggest surprise I think is this. The record of the Dow in pre election years of no losses since 1939 until 2015. So from 43 to 23 in post election years, excuse me, pre election years, The Dow is 20 and 1.

[Barry Ritholtz]

Wow.

[Jeff Hirsch]

And then the other thing with the four year cycle, there's a couple other discoveries or things we made but for the four year cycle, this thing I mentioned earlier was the post election year flipping from being the worst in the big history in the back of the almanac like I mentioned to being the best since 85.

[Barry Ritholtz]

So why do you think that is? The first year slump just hasn't materialized since really since the financial crisis. Are we blaming accrediting low interest rates in the Fed for this or is it something else?

[Jeff Hirsch]

I think it has something to do with the compression of the cycle that I've talked about, you know, where midterms have become much more important to hang on to the slim margins we've seen in recent years. And you kind of have that almost, you know, second pre election year, it's, it's a, the post election year, the first year of the term is really the pre midterm election year where they got to do stuff to make the voters happy so that they can keep their party in Congress as well or win back some seats, whatever it might be at the time.

[Barry Ritholtz]

So our final question, how should investors think about their investment postures relative to presidential cycles?

[Jeff Hirsch]

Well, we have a strategy where we use the, the seasonality, the best and worst months in, in conjunction with the four year cycle. We basically stay in from the, the midterm low, you know, the midterm buy signal, October through the post election year, April, May. So basically you want to avoid the the weak spots Q1 post election year Q1 first year is is one of the weak spots. Not quite as bad, but the real one I mentioned before, Q2 and Q3 the midterm year. And you want to back up the truck for the sweet spot for that, you know, October buy in the midterm year like we had in the classic one we had in 22. And I think you want to, you know, be leery of, you know, getting in and out at times when the cycle's troughing or peaking, just like you would do with with the seasonal cycle. So basically you want to be long Q4 midterm year through the post election year first quarter and sort of be more cautious in those those two years.

[Barry Ritholtz]

So to wrap up, investors with a long term perspective should prepare themselves for a little bit of softening following the first quarter of a new presidential term. Maybe it lasts four quarters, six quarters. Historically it's a little weaker than the rest of the cycle when it makes that low. Whether that's the summer or October of the midterm year. That's what tees you up for really the best historical returns within a new presidency. So strap yourself in. Could get a little shaky for the next couple of quarters, but the payoff for that is from the midterm cycle through the last year of the presidency. I'm Barry Ritholtz. This is Bloomberg's at the Money.

[Brandon Mitchell]

World Class journalists, global leaders, influential thinkers, cutting edge data January 20th to 23rd in Davos, conversations at Bloomberg House will provide the context you need on the biggest stories that will shape the year ahead, from AI and the future of tech to geopolitics, markets, sustainability, inequality and more. Join us in person or watch live. Visit bloomberglive. Com bloomberghousedavos to learn more.