Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Chapter 9

Leverging the Election Cycle

There is a lot of belief in the investment world that the third year of every presidential cycle is good for the stock market. But given that we just finished a pretty mediocre third year of a presidential cycle, and are now in a fourth year, perhaps a better starting point for thinking about the presidential cycle in general is to think about the fourth year of the presidential cycle, and how to make money from understanding the little greater context for the upcoming election. The price returns of the Dow Jones Industrial Average (DJIA) from 1928 through 2007 are shown in Table 9.1 and exclude the impact of dividends.

Table 9.1 Presidential Cycle—Average Nominal Price Returns

Year 1 of presidency	3.82%
Year 2 of presidency	4.71%
Year 3 of presidency	13.24%
Year 4 of presidency	7.61%
Source: Congressional Effect Management, LLC

This is the sort of data that has sparked interest of both academics and market participants. Once again, we are at least in Super Bowl indicator territory in the sense that 20 “cycles” is not a lot of data from which to draw statistically sound conclusions. Nevertheless, there is some statistical evidence that the third year of a presidential cycle is good for investors. In their paper “Financial Astrology: Mapping the Presidential Election Cycle in the U.S. Stock Market,” Wing-Keung Wong and Michael McAleer found that “there were statistically significant presidential election cycles in the U.S. stock market ...