The Four Year Cycle
The four year stock market cycle usually is called the Four Year Presidential Cycle or the Four Year Economic Cycle. Historically, the four year cyclical low for the U.S. stock market has occurred within three months prior to the U.S. midterm election held during the second year after a president has been elected. On average, U.S. equity market advance thereafter for the next 22 months. The best period for performance by the S&P 500 Index during the four year cycle has been the nine month period following the four year low.
The series of recurring events trigger the four year low in the U.S. Presidential cycle:
- The President uses his “political capital” to complete difficult items on his agenda during the first year of his mandate. His standings in the “popularity” polls diminish.
- The opposition party in Congress starts to raise concerns about the President’s actions early in the second year of his mandate. Plans to gain more seats in Congress during the mid term elections are prepared.
- Political rhetoric builds during late spring and summer. Congress is spending more time debating each other than considering legislation.
- Rhetoric raises concerns about economic activity.
- Growth in the U.S. economy starts to slow. Corporate revenues and profit margins come under pressure into the second and third quarters.
- The mid-term election is held on the first Tuesday in November
- The political agenda shifts, the president looks for ways to improve the economy prior to the end of his four year term, economic growth accelerates, corporate revenues and earnings improve and stock prices go higher.
Less well known is the tendency by all major developed nations to complete a four year economic cycle that corresponds to the U.S. Presidential Cycle. Four year economic cycles and their corresponding four stock market cycles also occur in Canada, the United Kingdom, developed European countries and Japan.
The four year stock market cycle has been exceptionally reliable for many decades. The U.S. stock market has recorded a four year low on 26 of the past 29 occasions since 1890. The only three occasions when the four year low was not identified just prior to the U.S. mid-term election were 1936, 1986 and 2006. On each occasion, the U.S. equity market continued to move higher without a correction of 5% or more. The miss in 1936 was followed by a substantial correction in 1937. The miss in 1986 was followed by a substantial correction in October 1987. The miss in 2006 was followed by a significant correction in late 2007/ early 2008.