Kaufman Signals

The Presidential Cycle and Market Watch for 2016

Politics being what it is, looking at the four-year cycle of returns for the stock market makes sense. It is in the incumbent party’s interest to try to make visible improvements in the quality of life, national affairs in general, or some specific issue that pleases the public as an election approaches. At least that’s what I would do. I would also expect next year – the election year -- to post good stock market returns so that many voters have a sense of wellbeing. The domestic economy has always been an issue that drives voters to the polls. But have times changed?

There has been a lot of published numbers on the Presidential Cycle, the most complete published in 1994 by Adam White (“The Eight-Year Presidential Election Pattern,” Technical Analysis of Stocks & Commodities), but only one of many. Arthur Merrill published another in March,, 1992 in the same magazine. To compare then and now, we’ll use the numbers from White’s article.

Adam White summarized the returns of the stock market in 4-year cycles from 1912 through 1992. We’ve looked at the same pattern of returns from 1984 through June, 2015. S&P futures started trading in 1983 and, we believe, changed the nature of the market. If not the nature, certainly the participants. The chart below compares the results of White’s study with the past 30 years.

Fig 1 Adam White vs recent 30 years

Source: Perry J Kaufman, Trading Systems and Methods, 5th Edition (Wiley, 2014). New data source: CSI.

With the exception of the election year (the next one is 2016), the years have all returned profits on average. We could look for an explanation in the way Congress has been split in recent years, perhaps more so than in earlier years. A government run by one party may be able to delivery good news to voters just ahead of an election. But that’s not what is happening. This year, the 3rd year of the cycle, has consistently performed well, and may still do so this year.

Digging Deeper

Let’s look at the same results in two different ways. There may be an argument that the “election years” should run from November through October, rather than a strict calendar year. After all, the actual election is in early November and effectively everything changes after that. We would like to see if those two months make a difference in the Presidential Cycle. The chart below shows an interesting shift in the first and last years while the two middle years remaining similar.

Fig 2 Shift Dec to Oct

Data source: CSI

Now let’s assume you were trading only one of the four years in the cycle, either ending in December or October. The cumulative returns for each cycle are shown below on the left scale and the number of years at the bottom. The most consistent is the 3rd year, this year, 2015. The worst is clearly the election year, 2016.

Fig 3 Cumulative returns

Data source: CSI

Given the erratic nature of the markets, the charts show that the first three years of the Presidential Cycle can be profitable over time, but the election year is no longer profitable as it had been from 1912 through 1992. Times change.

 

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