Given the spectacular rally we've just seen overseas, I thought it was timely to repeat part of a post I contributed at the start of November last year. Apologies that a couple of the cached links have since broken, but everything is still available on the Internet for those who look.
"Tip 3 - The Presidential Cycle
http://www.dogsofthedow.com/prescyc-m.gif
In a nut shell, the best time to invest should be October 2002, with a view to selling by April 2003. That's the main course and it's that simple. If one hungers for desert, consider investing in October 2003 and selling by January 2004.
The chart above presents the Dow Jones Industrial Average's 4 year presidential cycle from 1897 to the present and comes from http://www.dogsofthedow.com/prescyc-m.htm . It's a good site and there are various other illuminating cycle charts on offer eg. http://www.dogsofthedow.com/moncyc-m.htm and http://www.dogsofthedow.com/thedow.htm .
Hundreds of articles and studies about the Presidential Cycle can be found on the Internet eg. http://www.google.com/search?hl=en&q=+%22presidential+cycle%22+stock . It is easily one of the most reliable market cycles known and some have looked at it all the way back to the early 1800's. To a lesser extent, the cycle applies to other indices and markets as well.
One of the better introductory articles with references can be found at http://www.google.com/search?q=cache:sN3LX6S48fU:investingcanada.about.com/library/weekly/2000a/aa030200.htm++%22presidential+cycle%22+stock&hl=en .
How well and why the phenomenon works is well described in http://www.vectorvest.com/editorial/vvelection.htm eg.
"According to Yale Hirsch, Editor of Stock Trader's Almanac, "the last two years of the 41 administrations since 1832 produced a total net market gain of 557% compared with 81% gain of the first two years of these administrations. The average gains were 13.6% and 2.0% respectively. Clearly, incumbent administrations not only strive to look good in the last two years in office, but they make the hard decisions, such as raising taxes, during the first two years."
For those who enjoy being bears, frightened out of their wits or gloat about having told-you-so, http://www.cross-currents.net/archives/jul01.htm should be of interest.
One can also find various studies on the cycle's effect during various types of Presidencies and attempts to fine tune the theory by trying to take into account once-in-a-generation effects like the Great Depression. Such tunings may or may not be valid and useful. For what it's worth, one of the more interesting ones is: http://www.erlanger2000.com/dppres.htm for which the description is:
"We have changed this chart to show our 20-year seasonal cycle extended over the next ten years. This cycle is a combination of the decennial pattern and the Presidential cycle, and is comprised using data from 1916 to 1979. The top chart is completely exogenous data of the Dow (log scale). The happy and sad faces coincide with the cycle trend shifts. Currently, the seasonality is negative until mid-2002!"
Yale Hirsch further contends http://www.google.com/search?q=cache:7yScBQC7OTY:www.sagit.com/sagapr96.htm++%22presidential+cycle%22+stock&hl=en that :
(1) "Pre-Election years, 1995 being the latest, have been the best followed by Election years. On the other hand, Post-Election years have produced a cumulative market loss since 1832.
(2) The market favours Republicans. The cumulative rise has been twice as good under Republican Presidents.
(3) When the party in power stays in power, post-Election years produced a cumulative loss and a below average gain over the four year term. The market favours new administrations.
(4) Hirsch says, "Wars, recessions and bear markets tend to start or occur in the first of the term; prosperous times and bull markets, in the latter half."
If one wants to get really picky about cycles and see how other types of markets relate to each other and the stock market, one place to start could be http://www.geocities.com/WallStreet/1610/fact.html .
However, it's hard to go past the quality big picture presentations of http://www.asianbusinesswatch.com/Strategy.html , which includes the Presidential Cycle as one item http://www.asianbusinesswatch.com/Presidential.PDF . A summary point simply states, "Buy the correction at the mid-term elections and sell with the election of a new President" - caveat - "very destabilising events" can overshadow the cycle.
Having sold in January 2004, one might wonder whether 2005 will be dull right until the end ie. the next time to buy. Fear not too much for this is where the "year ending in the number 5" cycle kicks in. That cycle has always produced an up year in the stock market since the early 1800's http://www.wall-street-money.com/cycleana.htm .
Finally, stock prices cycle largely due to changes in sector appeal and especially due to changes in money flow relating to the overall market. Whereas the Presidential Cycle works well for the U.S. stock market as a whole, it may not be overly reliable for individual stocks and sectors, some of which may even normally move in a contrary fashion."
