At The Cash: Jeff Hirsch on Presidential Investing Cycles. (January 25, 2025)
What does historical past inform us about how newly elected presidents affect the market cycle? What ought to buyers count on from the subsequent 4 years?
Full transcript under.
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About this week’s visitor:
Jeffrey Hirsch is editor of the Inventory Dealer’s Almanac & Almanac Investor E-newsletter.
For more information, see:
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Discover all the earlier On the Cash episodes right here, and within the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg. And discover the whole musical playlist of On the Cash on Spotify
Beforehand:
On the Cash: Seasonality In Shares (December 21, 2023)
Hirsch’s WTF Forecast: Dow 38,820 (September 28, 2010)
Tremendous Growth: Why the Dow Jones Will Hit 38,820 and How You Can Revenue From It (April 12, 2011)
Jeff Hirsch on Presidential Cycles
New yr, new president, new insurance policies. What can we count on when a brand new president takes over the white home? I’m Barry Ritholtz. And on right this moment’s version of on the cash, we’re going to debate how presidential cycles have an effect on markets and equities to assist us perceive all of this and its implications in your portfolio.
To assist us perceive all of this and its implications in your portfolio, let’s usher in Jeff Hirsch. He’s editor in chief of the Inventory Merchants Almanac since Could 2003. And in 2011, he was the creator of the ebook, “Superboom, Why the Dow Jones Will Hit 39,000 and How You Can Revenue From It.” Full disclosure, I wrote the foreword to that ebook.
So, so let’s soar proper into the presidential cycle principle. Your father, Yale Hirsch, developed this idea in 1967. Clarify his principle.
Jeff Hirsch: Yale actually put the presidential cycle, the four-year cycle, on Wall Road’s map when he revealed the primary almanac again in ’67. Backside line, it’s about presidents attempting to get re elected. They attempt to make voters completely satisfied, uh, prime the pump, um, within the third yr, um, we’ve received a complete web page on how the federal government manipulates the economic system, most lately the 2023 inventory merchants almanac, and so they actually attempt to prop it up within the third yr, and so they handle their least savory coverage initiatives and agenda gadgets within the first two years, I feel what we’ve seen lately with Trump 2.0 on day one, et cetera, is a working example of that, attempting to get quite a lot of stuff completed. Overseas adversaries have a tendency to check new administrations early on. Ukraine in 22 is an efficient instance of that. And it form of creates this tendency for bear markets within the midterm yr. And that candy spot of the four-year cycle, the This autumn of midterm yr to Q2, pre-election yr, and in the event you bear in mind, October 22 is just about a textbook, midterm, basic October backside.
Barry Ritholtz: 1967 looks as if a very long time, totally different economic system, totally different market, totally different credit score cycle. How has the idea developed since, let’s name it 57 years in the past?
Jeff Hirsch: The primary years have been notoriously weak. I feel the most important change has been post-election years, which is what we’re in proper now at 25, have gotten a lot better.
It appears to be form of the identical priming of the pump forward of the midterm cycle now, the place they’re attempting to, um, hold on to as many congressional seats as potential. Put up-election years have improved dramatically since World Conflict II and extra dramatically since 1985, with the Dow averaging 17.2% in post-election years, 8 up, 2 down. Greatest common achieve of the four-year cycle, besting the pre-election yr, which Is one of the best over the long term at 15.2%, however the pre election yr solely has one loss Uh, although the common is just a little bit decrease. So Uh, it’s fairly bullish for 2025 for me, , I’m, I’m a, uh, uh, an up yr, 8 to 12 % is my base case with some pullbacks in Q1 and Q2, however , not the 20 plus % we’ve had the previous couple of years.
Barry Ritholtz: I feel again, uh, since this principle got here out in 67, Nixon, Ford ever so briefly, Carter, Reagan, Bush, Clinton for 2 phrases, Bush two for 2 phrases, Obama for 2 phrases, Trump, Biden, after which Trump once more. How has the presidential cycle principle held up over all these totally different presidents?
Jeff Hirsch: Fairly good basically. Aside from the nineties, , the, dot com increase, just about straight up throughout the late nineties. However there’ve been some derailments. Plenty of that is on web page 130 of your helpful Inventory Merchants Alamanac. I’m going to behave the entire four-year cycle, which I all the time hold in my desk. You possibly can confer with it your self.
There’s been some derailments, it’s not good. We had the tremendous increase within the 90s into 2000. COVID was that form of large oversold — purchase there. Was it nonetheless yr? The final cycle, which I simply, , reset for subscribers 2021 to 24 was fairly textbook. You already know, not good, however it works pretty-damn properly over the lengthy haul.
Barry Ritholtz: Let’s speak concerning the strongest yr. Tends to be the third yr of presidential phrases. Traditionally, they kick out all of the stops. All the pieces they may do in yr three, tease them up for the election yr. No matter whether or not it’s them operating for re election. or their celebration, they, they actually are likely to ship this increased.
And as you talked about in 2024, plus 25 % is a monster yr. Maintain apart how the incumbent celebration loses with the economic system up as a lot because it was within the inventory market up that a lot. However what are the components that drive this sample? It’s been essentially the most constant a part of the, the cycle. The third yr virtually all the time appears to do rather well.
Jeff Hirsch: I received to repeat what we simply stated. I imply, it’s, it’s prime of the pump. It’s how the federal government manipulates the economic system to remain in energy. There’s, there’s a complete listing of things with altering social safety funds. I imply even in New York state, you’re a New York State resident. You bought a verify from from Gov Kathy Hochul simply forward of the election. I imply, it’s, it’s all the way down to the governor’s stage. It’s they’re not even attempting to cover it anymore.
It’s simply, , they’re doing the whole lot they will to to safe their legacy to retain energy for themselves, their celebration to make voters completely satisfied going into the sales space. And that’s what creates that. They received to do it forward of time as a result of they’re going to be campaigning within the election yr. In order that they received to do quite a lot of this stuff to prime that pump within the pre-election yr. And that’s essentially the most constant. A part of it. It actually units up that candy spot that we speak about.
Barry Ritholtz: Plus it does take a short time for issues like fiscal spending and tax cuts to make its means via the economic system.
If the third yr is the strongest. What’s traditionally the weakest yr and, and what are the components that, that maintain that again?
Jeff Hirsch: It’s the midterm yr. The second yr. (We name it publish, mid, and pre. That’s Yale’s, Yale’s outdated nomenclature).
We have been throughout this in 2022. Putin invading Ukraine helped. I feel a part of the rationale that he went in was due to the timing of the cycle the place he is aware of and different overseas adversaries know that there’s a vulnerability therein America, however it’s the midterm yr and that you may see it on our charts. We do the 4 yr cycle, breakdown by quarters.
The weak spot is Q2 and Q3 of the midterm yr. Dow’s down on common 2%, S&P 2.5%, NASDAQ minus 6.6%, and that units up that candy spot.
Barry Ritholtz: Any distinction within the historic information between, let’s say a president has two phrases between the four-year cycle of time period one and the four-year cycle of time period two or does it not matter?
Jeff Hirsch: It’s just a little bit higher. Not, not a lot. In time period two.
Barry Ritholtz: The idea being, hey, if the economic system is sweet sufficient for them to get reelected.
Jeff Hirsch: Particularly in that publish election yr, the fifth yr of a presidency, um, , they’ve received extra of a mandate. Uh, , we’ve seen, , on common about 9.7% for the S&P in these fifth years versus what it’s about all years about 9.5% of the all publish lectures, just a little bit decrease than that. But it surely’s been quite a bit higher in latest historical past. You already know, you return to, , 1917, 1937, ‘57, ‘73, all weak years. In that fifth yr, um, however since, since 85, , publish election years, fifth years are nice.
Barry Ritholtz: Right here’s a very random query, and I do know there’s no actual good reply to this. Does it matter if the presidential phrases are non-consecutive? I do know we’ve now an information set of 1 earlier than this.
Jeff Hirsch: Perhaps, perhaps one. I imply, 1893, we had the panic in 1893. The despair from 1883 to 1997, we had what? Was there even indoor plumbing in every single place again then?
I don’t assume so. Not precisely the identical market. No, not precisely the identical world. (from Fiddler, it’s a brand new world, Golda) It’s a lot totally different, um, however it’s nonetheless all about, constructing their legacy, retaining the celebration in energy, and, um, just a little little bit of ego concerned there, however, uh, it’s attempting to make issues look as nice as potential for his or her celebration and their, and their legacy.
Barry Ritholtz: So It’s humorous we’re speaking about 1893. It appears like America right this moment is extra partisan and extra polarized than it’s been actually in our lifetimes. Does which have any affect on the presidential cycle?
Jeff Hirsch: I don’t assume so. I’m undecided if it’s if it’s notion. Um, , we all know one another a very long time. We all know quite a lot of the identical folks within the enterprise. I’ve quite a lot of buddies from totally different factors of view. There’s folks within the enterprise totally different factors of view. However once we speak about issues, there’s much more in widespread than totally different, even with the folks on totally different ideologies and totally different political factors of view.
If something, I feel it’d amplify the 4 yr cycle as a result of it’s extra incumbent upon the incumbents (pardon the alliteration there) to retain energy and to attempt to hold their celebration in Congress. And I feel it may actually amplify it.
Barry Ritholtz: So that you’re an information wonk, you’ve been going via the Inventory Merchants Almanac in your entire profession. You’re all the time all these fascinating numbers and, and market information. What’s been the most important shock or anomaly you’ve noticed in presidential market cycles?
Jeff Hirsch: To start with, I grew up doing this. I imply, I took over the editorship in 03, however, I grew up operating these numbers by hand and out of Barron’s with just a little ruler and a purple pen and, , an including machine and graph paper with a, with a, with a pencil.
The most important shock I feel is the document of the Dow in pre-election years of no losses since 1939 till 2015. So from 1943 to 2023 in, in publish election years, excuse me. Pre election years, the Dow is 20 and 1.
After which the opposite factor, with the 4 yr cycle, there’s a pair different discoveries and issues we made, however for the 4 yr cycle, this factor I discussed earlier was the post-election yr flipping from being the worst, , within the large historical past at the back of the Almanac, like I discussed, to being one of the best since 85.
Barry Ritholtz: Why do you assume that’s the first yr droop simply hasn’t materialized since actually, for the reason that monetary disaster? Are we blaming accrediting low rates of interest within the fed for this? Or is it one thing else?
Jeff Hirsch: I feel it has one thing to do with the compressor of the cycle that I’ve talked about the place midterms have turn out to be rather more necessary to hold on to the slim margins we’ve seen in recent times.
And also you type of have that nearly, , second pre-election yr. It’s the post-election yr of the primary yr of the time period is, is basically the, the pre midterm election yr the place they received to do stuff. Uh, to, to make the voters completely satisfied, um, in order that they will hold their celebration in Congress as properly, or win again some seats, no matter it’d, could be on the time.
Barry Ritholtz: So our last query, how ought to buyers take into consideration their funding postures relative to presidential cycles?
Jeff Hirsch: Effectively, , we’ve a technique the place we use the, the seasonality, one of the best and worst months together with the 4 yr cycle. We principally keep in from the midterm low. You already know, the midterm purchase sign October via the post-election yr, April, Could.
So principally, you wish to keep away from the weak spots. Q1 publish election yr, Q1 first yr is without doubt one of the weak spots. Not fairly as unhealthy, however the actual one I discussed earlier than, Q2 and Q3, the midterm yr. And also you wish to again up the truck for the candy spot for that, , October purchase within the midterm yr like we had within the basic one we had in 2022.
And I feel you wish to. You already know, be leery of getting out and in at instances when the cycle is troughing or peaking, similar to you’d do with the seasonal cycle. So principally, you wish to be lengthy This autumn midterm yr via the post-election yr first quarter and form of be extra cautious in these two years.
Barry Ritholtz: So to wrap up, buyers with a long-term perspective ought to put together themselves for just a little little bit of softening following the primary quarter of a brand new presidential time period – perhaps it lasts 4 quarters, 6 quarters. Traditionally, it’s just a little weaker than the remainder of the cycle. When it makes that low, whether or not that’s the summer season or October of the midterm yr, That’s what tees you up for actually one of the best historic returns inside a brand new presidency.
So strap your self in, may get just a little shaky for the subsequent couple of quarters, however the payoff for that’s from the midterm cycle via the final yr of the presidency.
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