Date
22 July 2017
As the candidates start their debates, the fourth year of the US presidential cycle begins. It is typically good for stocks and the economy. But will that hold true this year? Photo: Bloomberg
As the candidates start their debates, the fourth year of the US presidential cycle begins. It is typically good for stocks and the economy. But will that hold true this year? Photo: Bloomberg

Does US presidential cycle no longer work?

US equities and even global stocks have posted a strong rebound heading into the fourth quarter.

Now, the US presidential cycle heads into its fourth year this month.

How will that affect Hong Kong and US markets in the coming year?

What is the US presidential cycle?

The United States holds its presidential election every four years, each year lasting from Oct. 1 to the end of September the following year.

For example, since President Barack Obama won a second term in 2012, the period between Oct. 1, 2012, and Sept. 30, 2013, is considered the first year of the US presidential cycle.

The following 12 months is regarded as the second year, and so forth.

The fourth year of the current cycle started at the beginning of this month.

The US economy and stock market usually perform differently at different stages of the cycle.

For example, the economy is usually weak in the first two years of the cycle, in particular the second year.

The unemployment rate has averaged 6 percent and economic growth has averaged 2.7 percent in the second year of the cycles since 1948.

By contrast, the economy and equities tend to stage a recovery in the fourth year of the cycle, starting about 12 months before the presidential election.

The average unemployment rate fell to 5.6 percent and economic growth averaged 3.8 percent in the fourth year of the cycles over the same period.

US equities also fare well during the third and fourth years of the cycle.

Most believe that is due to the “visible hand”, as the president and his administration unveil various measures to seek re-election.

By contrast, most presidents are not eager to stimulate growth immediately after taking over the helm, which has led to dampened growth in the first and second years of the cycle.

However, the pattern has been broken in the third year of the current cycle.

The Dow Jones Industrial index tumbled 4.5 percent in the period, the first decline in the third year of the cycle ever.

And the S&P 500 index fell 2.7 percent, the second drop in a third year since 2011.

Hong Kong equities usually move in tandem with US stocks.

The Hang Seng Index usually moves in the same direction as the US market during the cycle.

Why has the US presidential cycle not worked well in recent years?

The central banks’ quantitative easing programs have distorted the market.

QE has become the main force behind stock market movements after the global financial crisis.

Simply speaking, the US Federal Reserve continued its QE scheme into the second year of the US presidential cycle, that is, from October 2013 to September 2014.

That propped up the stock market and reversed the usual downtrend in the second year of the cycle.

It remains unclear whether the US and Hong Kong markets will outperform heading into the fourth year of the cycle.

In fact, the US market slumped 20 percent during a fourth year that occurred between October 2007 and September 2008, because of the financial crisis.

This article appeared in the Hong Kong Economic Journal on Oct. 15.

Translation by Julie Zhu

[Chinese version中文版]

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