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  • Writer's pictureJeff Stukey

The Presidential Cycle: Preparing for the 2024 Election Year

One of the great things about the stock market is that there’s no one-size-fits-all strategy. There are many different approaches that can be successful, ranging from the upticks of day trading to years (even decades) worth of long-term buying and holding. Each strategy is unique and has distinct advantages and disadvantages.


Whether you consider yourself a long-term buy and hold investor, an intermediate trader, or a short-term trader, one persistent theme is that in order to be successful you must follow a system. Blindly guessing which stocks will outperform the market may yield fruit occasionally, but it won’t provide the steady, consistent profit flow that we’re aiming to achieve.


The 2024 Presidential Election takes center stage next year. As momentum begins to build, we’re revisiting this calendar anomaly to see what may be in store for investors. Calendar anomalies are an example of regular, exploitable patterns in the stock market that deviate from the norm. Politics aside, it’s pretty amazing how closely President Biden’s term has followed the historical patterns, albeit more drastic than average. Let’s see what the cycle points to in year 4 of the President’s term.


The Presidential Election Cycle Theory


As a quick recap, the Presidential Cycle is a theory devised by Yale Hirsch that suggests the stock market follows a pattern which correlates with a U.S. president’s four-year term. The election cycle consists of the post-election, midterm, pre-election and election years. 2023 was an example of a pre-election year, or the third year in the 4-year presidential cycle.

The chart below shows the average price pattern for the U.S. equity markets over the four-year election cycle. Notice how years three and four tend to be more constructive, with the third year the strongest of them all. Bear markets tend to put in a midterm year bottom sometime in the August-October timeframe just ahead of the midterm elections.


Image Source: McClellan Financial


This cycle’s midterm year was more severe than average, which makes sense when we consider that 2022 witnessed a foreign war, a 40-year high in inflation, and two consecutive quarters of negative GDP growth. But as we know, the market came roaring back to life in 2023, right on schedule with the typical pre-election year strength.


Stock performance normally improves in the latter half of the term as the President attempts to stimulate the economy, making voters feel more positive in an effort to get re-elected or keep the current party in power. The central bank, which is not completely independent, also seems to support the President in office through monetary policy in the second half. And sure enough, the odds of rate cuts have increased into 2024.


Election Years Tend to Be Bullish

Markets tend to climb higher in year 4 of a President’s term, albeit less than a pre-election year like 2023. When we factor in that the fourth year of the Presidential Cycle has historically witnessed the second-best performance of all four years, the future looks bright in this new bull market. Under new Presidents, election years have witnessed an average return north of 12% going back to 1950.


Image Source: Zacks Investment Research


Presidential incumbency is an influential phenomenon and considered to be a driving force behind the 4-year Presidential Election Cycle. The concept of a sitting President running for re-election is what has made the pre-election year the best year of the cycle and the election year the second-best. Dating back to 1952, the S&P 500 is up more than 12% on average in election years when a sitting President is running for re-election, versus just 6.7% in all election years. When there is an open field (meaning years with no incumbent running for a second term), the S&P 500 has averaged a -1.5% loss.


Image Source: Stock Trader's Almanac


Biden announced his 2024 re-election campaign earlier this year. This is not to say the year ahead will be a straight line up. These are historical statistics and simply speak to probabilities; there is always volatility along the way. But it’s comforting to know that history is on the side of the bulls as we head into the New Year.


Other Historical Stats Supportive of Stocks

 

Dating back to 1932, there’s only one instance spanning all new bull markets in which the 2nd year (which began in October of this year) showed a negative return. In fact, it may not seem like it, but this was the weakest first year of a new bull market since the year following the 1987 crash. The good news? Stocks gained 29% in the 2nd year of that bull cycle.

 

We’re coming off a historic November rally that saw the S&P 500 gain about 9% during the month. From a longer-term perspective, the outsized monthly return from November bodes well for a continuation of this new bull market. In previous instances where the S&P 500 achieved a greater than 8% return in a single month (30 times dating back to 1950), a year later the index was higher 27/30 times with an average return of 15.8%. Those are compelling odds to say the least.


Recent strength in sectors like financials, industrials, and health care points to a market breadth expansion that is bullish, increasing the likelihood that we will ultimately eclipse the all-time highs in the major indexes sooner than later. The Dow has already achieved this feat, while the S&P 500 is less than 2% away from that mark; the previous 14 times the S&P 500 went at least a full year without a new high and then finally made one, a year later it was higher 13/14 times and up nearly 15% on average.


Final Thoughts


The stage is set for this rally to continue in 2024. The Presidential Cycle shows us that stocks tend to climb higher in year 4 of a President’s term. The fact that President Biden is running for re-election adds to the bullish case.


Positive themes such as decelerating inflation, lower treasury yields, and a less hawkish Fed all bode well for returns moving forward. A broadening out in terms of participation has led to other sectors outside of technology witnessing renewed strength; the improvement in market breadth is necessary to help sustain the new bull market.


*Content provided by Zacks Investment Research. An American company dedicated to the production of independent research and investment-related content. It was founded in 1978 by Len Zacks, based on his insights while pursuing his Ph.D. at MIT.

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