Several of our accounts have asked me to look at the relationships between the presidential election cycle and the business cycle, the Fed cycle, and the cycle in stock prices. I put together a chart publication titled Presidential Election Cycles. On balance, these elections tend to coincide with recessions and bear markets. However, there have been exceptions, and I remain bullish about the current outlook for the economy and the stock market. That’s partly because Fed officials are likely to postpone another rate hike until after the election, as they often have in the past. Here are my quick takeaways:
(1) Recessions. Since 1947, when quarterly GDP was first compiled, there have been 17 presidential elections. There were 11 recessions over this period, and almost all of them either coincided with elections or occurred shortly thereafter. There were only five instances when there was no recession between elections.
The political cycle suggests a high probability of a recession next year. I’m not sure what Hillary might do to cause one, though I’m sure she can think of something. It’s not hard to foresee a recession next year if the Donald wins and immediately declares that our trade treaties are null and void, slaps tariffs on imports from Mexico and China, and penalizes US companies that he views as having sent US jobs abroad. On the other hand, either one of them might not venture far from the status quo of the past several years, which has been a bullish environment for stocks.
(2) Fed rate hikes. As was demonstrated by the FOMC’s statement today, the Fed is in no rush to hike the federal funds rate again. The committee decided to pass on a rate hike, though the statement indicated that the economy and labor markets are doing well, inflation is likely to move closer to 2% “over the medium term as the transitory effects of past declines in energy and import prices dissipate,” and “[n]ear-term risks to the economic outlook have diminished.”
The next three meetings of the FOMC are scheduled for September 20-21, November 1-2, and December 13-14. After the statement was released, the bond market rallied and the spread between the 12-month ahead and the nearby federal funds future narrowed.
My analysis of the federal funds rate since 1954 shows that the Fed has on several occasions held off on raising this rate until after the presidential elections. The same is likely to happen this year. I am still thinking that none-and-done is more likely than one-and-done this year. However, a rate hike during the last meeting of the year is possible. If the “gradual” normalization of monetary policy means a 25bps increase once a year for the foreseeable future, then rates will remain awfully low for a while.
(3) Bear markets. Since 1961, there have been nine bear markets in the S&P 500. Five of them coincided with the elections, and they were among the longest of the lot.
(1) Recessions. Since 1947, when quarterly GDP was first compiled, there have been 17 presidential elections. There were 11 recessions over this period, and almost all of them either coincided with elections or occurred shortly thereafter. There were only five instances when there was no recession between elections.
The political cycle suggests a high probability of a recession next year. I’m not sure what Hillary might do to cause one, though I’m sure she can think of something. It’s not hard to foresee a recession next year if the Donald wins and immediately declares that our trade treaties are null and void, slaps tariffs on imports from Mexico and China, and penalizes US companies that he views as having sent US jobs abroad. On the other hand, either one of them might not venture far from the status quo of the past several years, which has been a bullish environment for stocks.
(2) Fed rate hikes. As was demonstrated by the FOMC’s statement today, the Fed is in no rush to hike the federal funds rate again. The committee decided to pass on a rate hike, though the statement indicated that the economy and labor markets are doing well, inflation is likely to move closer to 2% “over the medium term as the transitory effects of past declines in energy and import prices dissipate,” and “[n]ear-term risks to the economic outlook have diminished.”
The next three meetings of the FOMC are scheduled for September 20-21, November 1-2, and December 13-14. After the statement was released, the bond market rallied and the spread between the 12-month ahead and the nearby federal funds future narrowed.
My analysis of the federal funds rate since 1954 shows that the Fed has on several occasions held off on raising this rate until after the presidential elections. The same is likely to happen this year. I am still thinking that none-and-done is more likely than one-and-done this year. However, a rate hike during the last meeting of the year is possible. If the “gradual” normalization of monetary policy means a 25bps increase once a year for the foreseeable future, then rates will remain awfully low for a while.
(3) Bear markets. Since 1961, there have been nine bear markets in the S&P 500. Five of them coincided with the elections, and they were among the longest of the lot.
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