The Presidential Cycle refers to the pattern of behavior in stock prices throughout the four years of a presidential term. While there are many factors influencing stock prices during a particular period of a particular presidential term, it has been one of the more historically consistent seasonal patterns. Specifically, stocks tend to be strong during certain periods of a president’s term and weaker during others. And, historically, the worst 2-quarter stretch of the presidential cycle is the period spanning the 2nd and 3rd quarters of the second year of a president’s term. The stretch began this week.
Over the past 100 years, average returns in the Dow Jones Industrial Average for both the 2nd and 3rd quarters of “year 2’s” have been negative, the only consecutive negative quarters of the entire cycle.
Furthermore, in aggregate, the 2-quarter stretch ending with the 3rd quarter of year 2 of the presidential cycle is the only 2-quarter stretch with a negative average return in the entire cycle.
Of course, seasonality is only one factor affecting stock prices. Therefore, this negative historical tendency should only be treated as a gentle headwind. However, after a lengthy stretch in which bulls seemed to have just about everything going their way, more and more of these potential headwinds seem to be popping up of late.
The SPDR Dow Jones Industrial Average ETF (DIA) closed at $239.13 on Friday, down $5.78 (-2.36%). Year-to-date, DIA has declined -3.33%, versus a -2.68% rise in the benchmark S&P 500 index during the same period.
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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.