How to Play the Election Cycle in Your Favor
We’re less than one year from Election Day.
Ire and unease are already gripping the nation. In fact, a majority of Americans recently listed the 2020 election as the biggest stressor in their lives.
Keep that nugget in mind. Because for investors looking ahead to 2020, the U.S. presidential election adds another dose of uncertainty.
Rest assured, there is a trend that we can turn to for guidance over the next 12 months: the U.S. presidential cycle.
Historically, when a candidate takes office, they transition from campaign mode to governing. That means trying to fulfill all those promises they made on the campaign trail. Many of which aren’t the biggest boosters for stocks.
So the first and second years typically aren’t very strong for the markets. Plus, the second year includes midterm elections. The party sitting in the White House tends to lose the most congressional seats that year.
But the third year is exceptionally strong as the president and others return to campaign mode. And the fourth year has historically been quite positive.
Because of this, the traditional investing view of the U.S. presidential cycle, posed by trend-trading icons like Yale Hirsch, is that the third year is the strongest, followed by the fourth, second, then first.
But here’s the thing… Times change, and so do trends.
Over the last couple of elections, I’ve proposed the “Odd-Year Presidential Trading Strategy.” This is what I used to predict that the S&P 500 would increase 19% in 2017 no matter who won… which it did.
It’s what I used to predict the “Great Correction of 2018”… which we got.
And it’s what I used to predict at least a 17% return in 2019… which we got.
Today, it’s also why I believe investors should be cautious in 2020. Because over the last three decades, we’ve seen a shift…
In five of the last eight presidential terms, the Dow Jones Industrial Average’s best years – by far – have been the first and third years.
As U.S. elections have become more divisive and heated, the markets have faced more uncertainty during election years.
Remember, the biggest stressor for most Americans is already the 2020 election. And it’s still nine months away!
Now, does that mean the markets are going to collapse in 2020? Not necessarily.
My advice is to not expect a 20% return in 2020. And look to get a little more defensive with your holdings.
As I’ve said before – and will continue to say for years to come – identify the trend and act accordingly.
Here’s to high returns,
A Fitness Stock With Room to Run
June 16, 2020