Pre-Presidential Election Years

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

In last month’s Commentary we discussed the January Barometer, with a couple of days left to get the official number. Just to refresh our memories, it states that as the S&P 500 Index goes in January so goes the year. This has had an 84% accuracy ratio going back to 1950. This January the S&P 500 Index finished up +6.28%. It’s important to state that this is a point-to-point indicator, meaning that it doesn’t describe everything that is going to happen in between January 1st and December 31st. Our experience during that time is what makes investing interesting.

One of the most impressive and predictable indicators is called the pre-presidential election year indicator. There has only been one down year in the third year of a presidential term since 1939, after the Dow Jones Industrial Average (DJIA) was down -2.9%. That was in 2015, when the DJIA was down -2.2%. That’s a positive year in 19 out of 20 pre-presidential years, or 95% of the time! This includes 1987 when the market crashed in October but came back enough for a positive finish on the year. Pre-presidential election years are part of the powerful political stock market cycle.Each year has its own tendencies. In the third year of the election cycle, the presiding administration will work to pump up the nation’s economy so they can have a strong finish going into the next election. It’s actually fairly reasonable and logical.  It’s probably why it is so uncomplicated and so predictable. Incidentally, most bear markets take place in the first or second year after an election, such as the bear market that we had in 2022.

While 2023 is a pre-presidential election year, that does not rule out the possibility of high volatility.  February has been sharply lower. The DJIA is down -3.51% MTD and is now off -0.69% YTD, with the S&P 500 Index down -2.46% MTD and up +3.66% YTD. Mid cap and small cap equities have held up better with the S&P MidCap 400 Index down -1.84% MTD and up +7.21% YTD, and the S&P SmallCap 600 Index down -1.38% MTD and up +7.96% YTD. 

International equity markets do not participate in the U.S election cycle. Recently they have been ‘caboosing’ behind domestic equity markets and that has been the case in February. The MSCI EAFE Index is down -2.98% MTD and up +4.88% YTD. The MSCI Europe Index is down -1.90% MTD and up +6.61% YTD. And the MSCI Emerging Markets Index is down -5.73% MTD and up +1.72% YTD. Developed international equity markets continue to maintain their lead YTD equities as the Ukraine-Russia war passes its one-year anniversary.

Bond markets have also been weaker in February, giving up most to all of their January gains. The Bloomberg US Aggregate Bond Index is down -2.82% MTD, and up +0.16% YTD. The Bloomberg Municipal Bond Index is down -2.29% MTD, and up +0.51% YTD. The Bloomberg US Corporate High Yield Bond Index has lost -1.74% MTD and is up +2.00% YTD. The Bloomberg Global Aggregate Bond Index has lost -3.54% MTD and is now down -0.37% YTD. The bear market for bonds is still in place, and bonds do not participate in the pre-presidential election cycle like equities.

One of the prevalent arguments on equities is whether we have seen the bear market low. October is called the ‘bear killer’ because it marked the end of bear markets in 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, and 2011. That’s a pretty impressive record. The 2022 bear market low was on October 13th. Since then the S&P 500 Index rose +20% to February 2nd , has broken the long-term downtrend, and is now up +13% after a very rough February. We are in the camp that the bear market low is behind us.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2023 Edward D. Foy.  [email protected],

Sources: StockCharts, Morningstar, Stock Trader’s Almanac