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Mid-term Presidential Election cycle

Posted By Barry Ritholtz On September 18, 2002 @ 11:30 am In Finance | Comments Disabled

“There is a season to every purpose:” Two cycles might make the Winter more profitable for the Bulls than the present September sell off: ½ Year investing cycles, and the mid-term Presidential Election cycle.

Seasonal cycles have a positive correlation with market performance; Historically, its been shown that its better to be in the market in the half of the year from November-April; May-October is the weaker investment period.

Separately, the 2nd year of the President’s term – a four year cycle – is typically a good time to start accumulating on the long side: A high percentage of mid-term years have produced bear market bottoms (See chart, right).

A review of the percentage gains from every mid-term election year lows to the Presidential Election year highs since 1918 reveals but one negative return; The notable exception was the post ’29 crash year of 1930. The lowest positive increase was 18.6% (1946). Every other previous mid-term election years have had index gains above 30%, excepting the 1930’s 25% gain and 1978’s 20% rise.

The risk of this sort of cycle analysis is that it runs against today’s environment: investors are far more concerned with 2-minutes – rather than 2-year – potential of investments.

Chart of the Week
pres_election_cycle.gif

1930, or 1974? That’s the big question for investors today; Were the July lows the final bottom (similar to post recession years like 1974 or 1982), or a mere stop on the way to lower lows?

The exception to the Presidential election buying cycle was the midterm election post ‘29 crash. Combining both cycles (discussed at left), though not a guarantee, improves the odds on the long side–once we work thru September/October.


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