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The Presidential Election Cycle Theory suggests that the stock market follows a pattern that correlates with a U.S. president’s four-year term.

The first two years of a term tend to be the weakest for stocks, according to the theory, as the president focuses on fulfilling campaign promises, but the market improves in the latter half of a term as the president pumps up the economy ahead of a new election.

Some historical stock market data does tend to sync up with the Presidential Election Cycle Theory, but past performance is not indicative of future results.

And market researchers and investors tend to be doubtful of the strategy, chalking it up to statistical coincidence as opposed to a real sign of a U.S. president’s power over the market.

They argue that company earnings, global economic data, and Federal Reserve monetary policy tend to be bigger influences on stock prices.

What is the Election Cycle Theory?

Yale Hirsch’s Stock Trader’s Almanac has data going back to 1833 in order to study the Presidential Election Cycle Theory. Below are the average stock market percentage gains in the four calendar years after a presidential election, according to the almanac’s 2020 edition.

Hirsch used the Dow Jones Industrial Average to track stock market performance after 1896 and other stock gauges for the years prior:

Postelection year: 3%
Midterm year: 4%
Preelection year: 10.2%
Election year: 6%

In a Wall Street Journal interview in November 2019, however, Jeffrey Hirsch, the son of Yale Hirsch, said that not all the historical data is relevant. Market observers have argued that going further back in history, U.S. presidents had even less sway over the stock market than in current times.

But according to Hirsch, the theory that the stock market is strongest in the third year of a presidential term has held up.

The almanac states that since 1943, in the third year of the presidential election cycle, both the Dow and S&P 500 have been up 15% on average. Meanwhile, since 1971, the Nasdaq indices have climbed 28.8% on average in the third year.

That’s because “incumbent administrations shamelessly attempt to massage the economy so voters will keep them in power,” the almanac states.

Stimulative fiscal measures designed to increase disposable income and a sense of well-being in the voting public have included:

•  Increases in federal budget deficits, government spending, and Social Security benefits
•  Interest rate cuts on government loans
•  Speedups of projected funding

Other points in the Presidential Election Cycle Theory:

•  Wars, recessions, and bear markets tend to occur in first two years; prosperity and bull markets in the second two years
•  The market performed better in election years when a sitting president is running. Since 1949, the Dow climbed 10.1% during election years when the incumbent is up for reelection vs. 5.3% in all election years and 1.6% in years with an open field
•  Times when the stock market rose between August and October in a presidential election year, the incumbent political party has retained power 85% of the time since 1936
•  Markets tend to be stronger when the incumbent party in power wins


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Does History Back Up the Presidential Election Cycle Theory?

The Presidential Election Cycle Theory hasn’t held up well in recent presidential administrations. The S&P 500 posted a strong gain of 19% in 2017, the first year of President Donald Trump’s term. The market also surged 29% in 2019, Trump’s third year and the best annual performance of his administration.

In each of President Barack Obama’s two terms, the first year saw the best annual performance, with the S&P 500 rallying 23% in 2009 and 30% in 2013.

Separately, the stock market has tended to rise more than fall, making the case that charting patterns with the election cycle may have more to do with coincidence. Since 1833, equity prices have risen in 115 calendar years and fallen in 70, data from the Stock Trader’s Almanac shows.

Barron’s also noted in November 2019, citing data from Ned Davis Research, that the weakest time in a four-year presidential cycle has historically actually been September of the pre election year to May of the election year.
Once the winner is determined, the market tends to rally regardless of political party.

Other political factors could also be in play, such as midterm elections. Barron’s also wrote in 2018 that the stock market’s performance during midterm election years hasn’t been stellar. Since 1942, the S&P 500 has gained 6% on average in midterm years, compared with 9.1% during the average year, the article stated, citing Ned Davis Research.

What About This Time Around?

Election Day was Nov. 3, and the new four-year presidential term will start on Jan. 20. Trump has been waging legal challenges to state ballot counts, while the S&P 500 rallied after some media outlets declared Joe Biden the winner.

In the past, uncertainty over the outcome of a presidential election has led to declines in the stock market. In 2000, confusion over hanging chads in the Florida ballot count meant the race between George W. Bush and Al Gore didn’t come to a swift conclusion.

Investor uncertainty over the outcome caused the stock market to plummet. Markets rebounded after the Supreme Court decision that ultimately resulted in a Bush win.

The conventional wisdom on Wall Street has been that a split government usually leads to strength in the stock market, as the division in power will lead to less ambitious policy changes.

So the potential outcome of a Democrat in the White House and both parties splitting Congress could lead to gains for the Dow and S&P 500. That said, business publications have reported that there is little evidence to back this idea up.

In the 45 years that the same party controlled Congress and the presidency, the S&P 500’s average return was 7.45%, the Wall Street Journal found. In the 46 years power was split, the average return was 7.26%. The index actually slightly outperformed when control of the presidency and Congress was unified under one party.


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What Does The Presidential Election Cycle Mean for Investors?

The history of U.S. presidential elections may not be a big enough sample set for making investment decisions.

The Wall Street Journal also pointed out that there has been no previous period when Democrats controlled the White House and the House of Representatives while Republicans controlled the Senate—a possible scenario in 2021.

That means investors could be in uncharted territory applying the Presidential Election Cycle Theory to the stock market in 2021.

An array of factors beyond presidential election cycles also influences share prices. Investors typically monitor company earnings, global and U.S. economic data, events like natural disasters and pandemics, and Federal Reserve monetary policy. Separately, periods of uncertainty—whether in monetary or fiscal policy—can also shape market performance.

Annual returns also don’t capture the volatility that could have happened during the year. For instance, the stock market has rallied in 2020, but it also entered into a bear market, a drop of 20% or more, in the first half amid investor worries over the COVID-19 pandemic’s impact on the global economy.

The Takeaway

The Presidential Election Cycle Theory states that the stock market’s performance improves in the four-year terms of US presidents as they gear up for reelection. Some investors say, however, that other factors, like corporate earnings and central bank policy, are bigger influences on share prices.

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To achieve financial freedom and grow wealth over long periods of time, it’s vital to understand the concept of inflation.

Inflation refers to the ever-increasing price of goods and services as measured against a particular currency. The purchasing power of a currency depreciates as a result of rising prices. Put differently, a rising rate of inflation equates to a decreasing value of a currency.

Inflation is most commonly measured by the Consumer Price Index (CPI), which averages the national cost of many consumer items such as food, housing, healthcare, and more.

The opposite of inflation is deflation, which happens when prices fall. During deflation, cash becomes the most valuable asset because it can buy more. During inflation, other assets become more valuable than cash because it takes more currency to purchase them.

The key question to examine is: What assets perform the best during inflationary times?

This is a much-debated topic among investment analysts and economists, with many differing opinions. And while there may be no single answer to that question, there are still some generally agreed upon concepts that can help to inform investors on the subject.

Is Inflation Good or Bad for Investors?

Depending on an individual’s perspective, inflation might be seen as either good or bad.

For the average person who tries to save money without investing much, inflation could generally be seen as negative. A decline in the purchasing power of the saver’s currency leads to them being less able to afford things, ultimately resulting in a lower standard of living.

For wealthier investors who hold a lot of financial assets, however, inflation might be perceived in a more positive light. As the prices of goods and services rise, so do financial assets. This leads to increasing wealth for some investors. And because currencies always depreciate over the long-term, those who hold a diversified basket of financial assets for long periods of time tend to realize significant returns.

It’s generally thought that there is a certain level of inflation that contributes to a healthier economy by encouraging spending without damaging the purchasing power of the consumer. The idea is that when there is just enough inflation, people will be more likely to spend some of their money sooner, before it depreciates, leading to an increase in economic growth.

When there is too much inflation, however, people can wind up spending most of their income on necessities like food and rent, and there won’t be much discretionary income to spend on other things, which could restrict economic growth.

Central banks like the Federal Reserve try to control inflation through monetary policy. Sometimes their policies can create inflation in financial assets, like quantitative easing has been said to do.

5 Tips for Hedging Against Inflation

The concept of inflation seems simple enough. But what might be some of the best ways investors can protect themselves?

There are a number of different strategies investors use to hedge against inflation. The common denominators tend to be hard assets with a limited supply and financial assets that tend to see large capital inflows during times of currency devaluation and rising prices.

Here are five tips that may help investors hedge against inflation.

1. Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust (REIT) is a company that deals in real estate, either through owning, financing, or operating a group of properties. Through buying shares of a REIT, investors can gain exposure to the assets that the company owns or manages.

REITs are income-producing assets, like dividend-yielding stocks. They pay a dividend to investors who hold shares. In fact, REITs are required by law to distribute 90% of their income to investors.

Holding REITs in a portfolio might make sense for some investors as a potential inflation hedge because they are tied to a hard asset—real estate. During times of high inflation, hard assets tend to rise in value against their local currencies because their supply is limited. There will be an ever-increasing number of dollars (or euros, or yen, etc.) chasing a fixed number of hard assets, so the price of those things will tend to go up.

Owning physical real estate—like a home, commercial complex, or rental property—also works as an inflation hedge. But most investors can’t afford to purchase or don’t care to manage such properties. Holding shares of a REIT provides a much easier way to get exposure to real estate.

2. Bonds and Equities

The recurring theme regarding inflation hedges is that the price of everything goes up. What investors are generally concerned with is choosing the assets that go up in price the fastest, with the greatest possible return.

In some cases, it might be that stocks and bonds very quickly rise very high in price. But in an economy that sees hyperinflation, those holding cash won’t see their investment, i.e., cash, have the purchasing power it may have once had.

In such a scenario, the specific securities aren’t as important as making sure that capital gets allocated to stocks or bonds in some amount, instead of holding all capital in cash.

3. Exchange-Traded Funds

An exchange-traded fund (ETF) that tracks a particular stock index or group of investment types is another way to get exposure to assets that are likely to increase in value during times of inflation and can also be a strategy to maximize diversification in an investor’s portfolio. ETFs are generally passive investments, which may make them a good fit for those who are new to investing or want to take a more hands-off approach to investing. Since they are considered a diversified investment, they may be a good hedge against inflation.

4. Gold and Gold Mining Stocks

For thousands of years, humans have used gold as a store of value. Although the price of gold or other precious metals can be somewhat volatile in the short term, few assets have maintained their purchasing power as well as gold in the long term. Like real estate, gold is a hard asset with limited supply.

Still, the question of “is gold a hedge against inflation?” has different answers depending on whom you ask. Some critics claim that because there are other variables involved and the price of gold doesn’t always track inflation exactly, that it is not a good inflation hedge. And there might be some circumstances under which this holds true.

During short periods of rapid inflation, however, there’s no question that the price of gold rises sharply. Consider the following:

•  During the time between 1970 and 1974, for example, the price of gold against the US dollar surged from $240 to more than $900 for a gain of 73%.
•  During and after the recession of 2007 to 2009, the price of gold doubled from less than $1,000 in November 2008, to $2,000 in August 2011.
•  In 2019 and 2020, gold has hit all-time record highs against many different fiat currencies.

Investors seeking to add gold to their portfolio have a variety of options. Physical gold coins and bars might be the most obvious example, although these are difficult to obtain and store safely.

5. Better Understanding Inflation in the Market

Ultimately, no assets are 100% protected from inflation, but some investments might be better than others for some investors. Understanding how inflation affects investments is the beginning of growing wealth over time and achieving financial goals. Still have questions about hedging investments against inflation? SoFi credentialed financial planners are available to answer questions about investments at no additional cost to members.

Downloading and using the stock trading app can be a helpful tool for investors who want to stay up to date with how their investments are doing or keeping an eye on the market in general.

Learn more about how the SoFi app can be a useful tool to reach your investment goals.

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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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