by Gary Alexander

February 7, 2023

In all the clatter over the “January Indicator” and “Super Bowl Indicator” (neither of which consistently work anymore), it’s easy to forget the most reliable calendar-based guide, and that is the four-year Presidential cycle, especially when there is a “course correction” during the mid-term election year.

So, forget the Super Bowl next Sunday and concentrate instead on the fact that it’s Lincoln’s Birthday! According to Stock Trader’s Almanac, Abe delivered 55.4% and 38% gains in 1862 & 1863, respectively, so Lincoln set an early pattern for mid-term market surges! (See Stock Trader’s Almanac 2010, page 130.)

The second year – the one just past – is historically the worst year of the four, but the fourth quarter usually rises. My colleague Jason Bodner and I have been predicting this since last summer, and it has come true right on schedule, with a market bottom on October 12, 2022, followed by an intra-day wash-out on Thursday, October 13, with all three major indexes seeing a 15% or greater gain on a closing basis since October 12, and an 18% or greater rise from the intra-day low of October 13 through last Friday.

But that is just the beginning, from a historical perspective. Year #3 of the Presidential Cycle is the yeast that bakes the cake, since it often marks the end of an over-spending monopoly of one political Party, and a forward-looking hope for a new cast of characters in 2024. Since the S&P fell over 25% from January 3 to October 12, 2022, we still have a long way to go just to reach a fresh new high, so any short-term “oversold” condition now is just a way station on the road to recovery of a lot of lost ground during 2022.

As you can see from this historical chart (with my detailed tables to follow), the bulk of Year 3 gains come during the first half of Year 3, and then the gains tend to dribble off toward year’s end. Since 1928, Year #3 has averaged +13.5%, while the other three years average a little over 5%.  The doldrums are highlighted below, from the middle of Year 1 (2021 in this case) to October of Year 2. Then comes the sweet spot – a nine-month run from just before the mid-term elections to June 30 of the following Year.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I have taken the time to average the fourth quarter of mid-term election years since 1954, and the first half of Year 3 since 1955 and come up with the individual years and the averages. First of all, the fourth quarter of mid-term election years averages a gain of nearly 7%, and the total gain from September 30 before the mid-term elections to June 30 of the following year averages over 20%.  For our purposes, the first half of Year 3 interests us the most, so here is the track record, with 100% positive gains each cycle:

Gains in the S&P 500 in the First Half (and Full Year) of Year 3 of Presidential Cycles Since 1955

Year #3 of Cycle Start of Year June 30 First Half Gain Full Year
  1955    35.98    41.03  +14.0%  +26.4%
  1959    55.21    58.47  +5.9%  +8.5%
  1963    63.10    69.37  +9.9%  +18.9%
  1967    80.33    90.64  +12.8%  +20.1%
  1971    92.15    99.70  +8.2%  +10.8%
  1975    68.56    95.19  +38.8%  +31.5%
  1979    96.11   102.91  +7.1%  +12.3%
  1983   140.64   168.11  +19.5%  +17.3%
  1987   242.17   304.00  +25.5%   +2.0%
  1991   330.22   371.16  +12.4%  +26.3%
  1995   459.27   544.75  +18.6%  +34.1%
  1999  1229.23  1372.71  +11.7%  +19.5%
  2003   879.82   974.50  +10.8%  +26.4%
  2007  1418.3  1455.27  +2.6%  +3.5%
  2011  1257.64  1292.28  +2.8%  +0.0%
  2015  2059.01  2103.84  +2.2%  -0.7%
  2019  2506.85  2980.38  +18.9%  +28.9%
  2023  3839.50  (to come)
17-cycle average:   +13.1%  +16.8%

This table shows how the bulk of Year #3 gains (13% of almost 17%) come in the first half, so we may have a positive year ahead of us, despite the gloomy headlines, which always seem to dominate the news.

The Top Years #3 of the President Cycle

The best Years #3 in the Dow since 1940 were 1975 (+38.3%) and 1995 (+33.5%). In the broader S&P 500, it’s the same story, with 1995 leading the pack (+34.1%), followed by 1975 (+31.5%) with the latest Year 3, 2019, coming in third, at +28.9%, so maybe we can look at those three cases and see if there is any hope for 2023 coming in among the top 3 of Year #3 case histories by the time Christmas arrives.

#1: 1975 was the year after the worst bear market of the second half of the 20th century, with the Dow falling 45% in nominal terms from January 11, 1973, to December 6, 1974, and falling far more in real (after-inflation) terms, since that was the time of the first energy crisis and rapidly rising inflation. That was also the time of Watergate, Nixon’s resignation, and the ignominious end to the Vietnam War, so 1975 was a “relief rally” of sorts. In the 1974 mid-terms, the Democrats gained 49 more seats in the House for a huge 291-144 super-majority – a reaction to Watergate and Ford’s pardon of Nixon, plus President Ford’s wimpy non-response to high inflation with his “Whip Inflation Now” (WIN) buttons.

There are some vague deja-vu echoes in 2023 in terms of Biden’s weak fight against high inflation, his ignominious exit in Afghanistan, echoes of a twice-impeached former President (Trump) in the shadows, and a brewing energy crisis, but our 2022 market swoon (at -25%) is nowhere near the 1974 drop of 45%.

#2: 1995 marked an exceptional launching pad for a five-year boom made possible by technology and the Republican sweep of the House – engineered in part by Fed Chairman Alan Greenspan raising rates seven times in 1994 to early 1995 while fighting phantom inflation. Greenspan may have fueled the voter unrest that led to the Republican’s first House majority since 1954, leading to the Contract with America.

President Clinton, to his credit, read the voters’ verdict correctly and said in his 1996 State of the Union address, “The era of big government is over.” Earlier, he pledged, “Welfare as we know it is over.” Clinton co-operated with the Republican Congress in balancing the federal budget three straight years, 1998 to 2000, aided in great part by a technology boom, fueled by the birth of the Internet. There was a small Dow gain in 1994 (+2.1%), then five straight boom years: +33.5%, +26.0%, +22.6%, +16.1%, and +25.2% (for a cumulative +200%, 1995-99). This story is repeatable if President Biden can learn how to co-operate with a Republican House, but indications are that Blue and Red don’t play well together now.

#3: 2019 may be the most likely year to repeat, if the Republican House can maintain the Trump tax cuts – which lifted minority family incomes faster than any other sector and boosted tax revenues as well – and can promote business growth and limit the array of new spending bills we’ve seen in the last two years. Markets look forward, and despite low earnings and a possible recession, today’s rising markets may be anticipating a return to a pro-business environment in this Congress and the 2024 Candidates.

The market apparently knows something good is coming, or it wouldn’t be up 15% since Columbus Day.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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