Early Four-Year Cycle Gains Borrow From Future
By: Christopher Mistal
May 12, 2015
In the time since issuing our Seasonal MACD Sell Signal on April 30, the market has struggled to make any meaningful headway. S&P 500 and DJIA made a brief run at new all-time highs, but came up short as they ran into projected monthly resistance (red dashed line in charts below). NASDAQ also bounced, but has had an even tougher time, now down over 100 points since its all-time closing high on April 24. The range the market has been stuck in for the better part of this year only continues to compress.

DJIA Daily Bar Chart
S&P 500 Daily Bar Chart
NASDAQ Daily Ba Chart

Although DJIA, S&P 500 and NASDAQ have repeatedly fallen below their respective 50-day moving averages, they have all remained firmly above their 200-day moving averages. A decisive move by two or more of the indices below their 200-day moving average would likely be viewed negatively by the bulls and celebrated by the few bears that currently exist. 

Stochastic, relative strength and MACD indicators (excluding DJIA as its MACD buy and sell indicators are meagerly positive) are neutral or negative. This earnings season has failed to move the market. All eyes must be on the Fed, awaiting further clues as to when they will finally begin to normalize (raise) interest rates. After an unprecedented run of near zero interest rates, there are bound to be a least a few disruptions. Many are anticipated, but inevitably there will be a few surprises as well, more likely negative than positive. Don’t expect the market to respond well to negative surprises.

Borrowed Returns

The four-year-presidential election cycle, is perhaps one of the most well-known historical cyclical patterns, which has stood the test of time. Going back to 1833, there have been 45 complete 4-year cycles, excluding the current one. Over these 180 years, DJIA preformed best in pre-election years with an average gain of 10.4%, second best in election years gaining an average 5.8% and worst in post-election years gaining just 1.9%.

[Presidential Election Cycle Returns Table]

Since the end of the Great Recession bear market in 2009, DJIA has been up six years straight with sizable above average gains in post-election years 2009 and 2013. DJIA also racked up above average gains in each of the two most recent midterm years, seemingly defying the four-year pattern. Before jumping to any hasty conclusions, let’s take a closer look at history.

Including the cycle that began in 2009, there have been nine cycles in history in which both the post-election and midterm years outperformed their respective averages (shaded light brown in table above). The cycle beginning in 1997 came at the tail end of the dot-com boom and was followed by a bust and the reassertion of the 4-year cycle. Back in 1985, the last secular bull market was just gaining steam, but got ahead of itself in 1987. Truman (1949) enjoyed four straight years of gains at the start of the post-World War II secular bull market. FDR’s first term also brought four straight years of gains, but this was following the Great Depression. Harding (1921) was also well received during his first two years in office but following his death in pre-election year 1923, DJIA struggled. McKinley, Cleveland and Grant also enjoyed solid gains during their post and midterm-year elections, but ultimately DJIA either cooled off or declined in the subsequent pre-election or election year. 

The four-year presidential election cycle has been disrupted by economic boom and gloom, but inevitably it has managed to reassert itself. Following the solid gains of the most recent post-election and midterm years, some weakness or underperformance this pre-election year is not without precedent. The streak of no losing DJIA pre-election years since 1939 is likely to continue, it just maybe with below average returns.