Alpha Power Investing Newsletter

October 1, 2018

The "Meat" of the Election Cycle
 

Much has been written about the 48-month election cycle that extends from one U.S. Presidential Election to the next. The conventional wisdom states that the first two years are typically tough for the stock market as an administration tries to get as much of the "dirty work" of governing done prior to the next mid-term election. Then the administration supposedly tries to rev up the economy and the general "state of things" in the next two years in order to try to win re-election, either for the incumbent or their party's candidate. Conventional wisdom presumes that this is bullish for the stock market.

As with a lot of forms of conventional wisdom, there is often a great deal of truth to this line of thinking, however, there is also a lot of variance from cycle to cycle. Fortunately, there is one part of the election cycle that has performed quite consistently. But first let's consider the first theory, i.e., "Two Bad Years, then Two Good Years" in the stock market.

We will consider the Post-Election Year and the Mid-Term year as the "first 2 years" of the election cycle, and the Pre-Election Year and the Election Year as the "second 2 years" of the election cycle. Our test period extends from 12/31/1934 through 8/31/2018 and uses monthly closing prices for the Dow Jones Industrial Average to measure performance.

  • Buying and holding the Dow only during the "first 2 years" of each election cycle since 1934 (including the first 20 months of the current cycle), resulted in a cumulative price gain of +477%.
  • Buying and holding the Dow only during the "second 2 years" of each election cycle since 1934 resulted in a cumulative price gain of +4,227% (8.9 times as much as the first 2 years).

Figure 1 displays the cumulative % growth achieved by investing in the Dow during these two separate two-year periods since 1934. You can clearly see, a) that the second 2 years did indeed generate a much greater cumulative return, but also, b) that there are no sure things (the bear market of 2007-2008 during the pre-election and election years is fairly obvious) from cycle to cycle.

If we dig a little deeper, we find that the real "meat" of the four-year election cycle occurs during the 15-month period that extends from October 1st of the mid-term year through December 31st of the pre-election year. To demonstrate this phenomenon, we will once again use Dow Industrials monthly closing prices, this time starting on September 30, 1934 (i.e., the start of the first 15-month "bullish" period) and compare the performance during the 15 "bullish" months to that of the 33 "other" months.

What we find from 9/30/1934 through 8/31/2018 is that:

  • The 33 "other months" of each four-year election cycle saw the Dow generate a cumulative price gain of +266%.
  • The 15 "bullish months" of each four-year election cycle saw the Dow generate a cumulative price gain of +7,550% (over 28 times as much as the 33 "other months".
  • Also, the 15 "bullish months" period saw the Dow generate a price gain 21 out of 22 times (95% of the time). The sole loser was a -3.1% decline during 1978-1979.
 

It should again be noted that there are no "sure things" in the stock market, regardless of how persistent any trend has been in the past, and there is always risk in the stock market. Note that the "Crash of 1987" - including a -22% decline in a day - occurred during the 15-month "bullish" phase. While the full 15-month period from 9/30/1986 through 12/31/1987 ultimately showed a +9.7% price gain, the October 1987 experience was a harrowing one for investors.

Summary
The stock market has been extremely strong since the 2016 election. This causes many investors to think that it can't continue. But for now, the overall stock market price trend remains bullish and we are just now entering what has historically been the most favorable period for stocks during the 48-month presidential election cycle.

To learn more about how Alpha participates in the 15-month bullish phase of the four-year presidential election cycle, please go to the Strategies and Performance section of our website at www.alphaim.net to read The Formula strategy brochure.

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.
877-229-9400
www.alphaim.net
info@alphaim.net

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in Figure 1 and Figure 2 do not represent actual trading and is not representative of any Alpha Investment Management strategy. The data does not include management fees or the cost of funds, trading, or other expenses. The illustrations are designed to quantify the effect of certain time periods (as specified) on the Dow Jones Industrial Average. Indexes are not investment vehicles and persons cannot invest directly in an index. The Dow Jones Industrial Average is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities. The data used to construct the illustrations was obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.
 

Alpha Investment Management, Inc. is a SEC registered investment advisor. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

© 2018 Alpha Investment Management, Inc.

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