Can You Time the Markets Based on the Presidential Cycle? (Podcast)

In a recent interview on Your Money, Your Wealth, a weekly radio show in San Diego, California, Rodney N. Sullivan, CFA, head of publications at CFA Institute and editor of the Financial Analysts Journal, told hosts Joe Anderson, CFP, and David Cook, CFP, that one of the biggest mistakes investors of all stripes make is trying to time the market. And with the November elections fast approaching, he cautioned investors against trying to time the market in the context of presidential election cycles.

Business commentators and academics have long noted the so-called “third year effect” in which stock returns on average are highest in the third year of a presidential term. According to Sullivan, “It is indeed true that under years three and four of a presidential cycle that stock markets do tend to perform better.” Looking at the historical data from 1926 to 2011, during the third year of a presidential term, stock markets have returned 13% on average — compared to roughly 5% in the first year and 8% over the course of a full four-year term.

Even though these data are not being misrepresented, Sullivan cautioned, they are “being misused or abused.” He offered two powerful counterexamples: In 1933, under President Franklin D. Roosevelt’s very first year, stocks rose more than 50%. Under President Herbert Hoover’s third year, stocks fell almost 50%.

“What really drives performance in markets is not the presidential cycle, it’s really the overall macroeconomy,” Sullivan said, pointing to QE3, the impending fiscal cliff, and the uncertainty in Europe as examples of factors that will affect markets more than the presidential election.

You can listen to Sullivan’s complete interview above or hear the full episode at the Your Money, Your Wealth website.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.