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Presidential Election Cycle Theory Definition
The Presidential Election Cycle Theory is a theory that predicts the United States Stock market after the assumption of office by a new President. As developed by a stock market historian, Yale Hirsch, this theory maintains that the stock market experiences the sharpest decline in the first year after a new year assumes office. The Presidential Election Cycle Theory posits that the year after the election of a new President in the US, the stock markets are at their weakest.
However, the stock market does not remain this level of decline, rather, it continually improves after the first year passes, up to the time of another election.
A Little More on What is Presidential Election Cycle Theory
When it was first developed, the Presidential Election Cycle Theory formed the basis for predicting the stock markets. The theory was developed by Yale Hirsch, following the most notable occurrences in the stock market after a presidential election. The theory has proven to be reliable and an effective market indicator since the time it was developed uo until the 19th century. However, the theory took a new form in the 20th century.
Due to the reliability of the theory up until the 19th century, stock investors used the Presidential Election Cycle Theory as a market timing factor. Data from the 20th-century uo until the 21st century have however shown that the theory has lost its potency in being a predictive theory of the stock market. Using the administrations of President Bush, Obama, and Trump as examples, the theory seems no longer predictive. The recent data have proven that the actions of the President and incidental occurrences in the market determine the states of the stock markets and not election aftermaths.
There are some key assumptions in the Presidential Election Cycle Theory, they are;
- The first year after the election of a new president is the weakest time in the stock market, but the second year becomes better than the first, but not in a significant manner. The reason for the decline in the stock market is due to the circumstances preceding the election in which the president was fully engaged, such as campaigns.
- The trend of decline in the stock market is due to the fact that for the first two years of presidency, priority is given to social welfare issues, tax laws, and environmental issues rather than strengthening the economy. This is revealed in typical campaign promises rendered by candidates.
- In the third and fourth year of a President’s administration, the President begins to make laws tailored towards strengthening the economy. This is the period the president goes back into the campaign mode and strive to win the votes of the people.