Opinion: The truth about investing in election years

Many investors believe they can time their investments with presidential elections and beat the stock market.

The Presidential Cycle Theory is one of many versions of this approach. It was introduced by Yale Hirsch in the 2019 “Stock Trader’s Almanac,” and it claims that stock markets do poorly in the year after a presidential election because the new president is focused on fulfilling general campaign promises. Year two is similarly weak. Years three and four, the president usually is thinking about reelection, so they pivot to the economy – for example, job growth initiatives and tax proposals – designed to put more money in voters’ pockets. And therefore, markets respond favorably.

Makes sense, right?

According to this method, an investor should get out of the stock market during the two years after an election, and then get back in until the next election.

For many presidencies preceding this theory, it seems to work. But anyone trying this after the 2008 election of Barack Obama would have missed big gains the first two years, only to see poor performance the last two years. The markets followed the same pattern during his second term. In addition to that example, the more you dig into actual results, the less this theory holds up.

In fact, an October 2023 Forbes article titled “How Do Elections Affect the Stock Market?” claims  the opposite of the Presidential Cycle Theory – proclaiming the first two presidential years are best, and years three and four are the bad market years.

But in the end, even this article advises investors to focus on portfolio diversification, ignore short-term fluctuations in favor of long-term investing, take advantage of higher interest rates, and other tried and true investing basics – nothing about timing elections, or Christmas, or 12-month averages, or any of the many other market timing strategies that have come and gone.

What about the idea that one political party or the other has the economic mojo to make stock markets purr? Statistically, there’s no difference. In fact, some market watchers tend to prefer nothing happens in Washington, D.C., based on the fair observation that politicians can tend to cause more problems than they solve. So, some say a divided, gridlocked government is best. But as always, there are enough exceptions to render that rule of thumb useless as well.

We love to look for patterns, especially if we believe there will be a reward for finding them. But the capital markets are so enormous and complex, they defy all attempts to find a magic formula. Every time someone thinks they have it, it evaporates. Sometimes, it evaporates partly because someone finds a trend, word gets around, everyone piles on and the very tactic that looked like a winner is forever disrupted.

Here’s the great news: You don’t need to outguess the stock market for it to grow your money. Any company strong enough to make it onto the major stock exchanges, and therefore into your investment funds, is there because it managed to profit in most economic conditions. As long as it continues to innovate and adjust to maintain profitability, its stock shares will mostly grow. If it fails to keep up, it will eventually drop out of the markets and out of your portfolio. In that way, the stock market is a self-regulating success club that will grow your money about 75% of the time. The other 25% can be troubling, but if you hold on through the downturns, markets always recover.

So, you can include stock investments in your long-term financial planning without worrying about beating the market, because no one really does that consistently. And you can stop searching for that ever-elusive market timing strategy, in an election year or otherwise. Market timing simply does not work.

Instead, create a budget and stick to it; save steadily based on a financial plan that you update regularly; invest to match your risk tolerance, timeline and long-term goals; and plan for sufficient stable cash sources for short- and midterm needs in case of market downturns.

And of course, for other great reasons, be sure to vote.

Certified financial planner Kenny Gott is president at Piatchek & Associates and author of the book “Bottom Line Financial Planning.” He can be reached at kgott@pfinancial.com.