In US, there is a four-year cycle in the stock market accompanies by the presidential election years. Usually, the market rises more in the pre-election year (95, 99, 03) than in the election year (96, 00, 04). The election year is the second best of those four years. The worst performance year is the post-election year (97, 01, 05) and the next worst is the midterm year (98, 02, 06).
The investment vehicles to use for both the seasonal and presidential cycle strategies are index funds, leverage funds and ETFs (such as the SPY and QQQs).
Mark Vakkur done a research in 1996 to analyze the optimum return of investment of the presidential cycles. He tested a number of different strategies to determine their profitability and had shown the comparison of Buy-and-hold to Presidential Election Cycles scenarios Jan 1950 - Dec 1995, in the descending order, are shown as below (value of $10,000 at the beginning):
Optimal Months: $5,189,384
Leverage Best Months: $2,183,257
2:1 Leverage: $1,272,369
Pre-election and election years: $733,605
Buy-and-Hold: $372,388 (8.4% ave annual return, 14.4% std dev)
100% Cash: $110,905 (5.5% ave annual return, 2.8% std dev)
Post-election and midterm years: $56,297
Strategies explained
Pre-election and election years - investing only in these two years of the presidential cycle and remaining in cash for the other two years.
Post-election and midterm years - the opposite of above.
2:1 Leverage - 50% margin in the pre-election year and 100% invested in election year.
Leverage Best Months - 2:1 leveraged (Nov - April) in the pre-election and election years; 100% invested during these same months in the post-election and midterm election years, and 100% invested during the May - Oct period during the same two years.
Optimal Months - 2:1 leverage in pre-election and election years in the following months in those years: Jan to April, July, Nov and Dec; 100% cash in May and Sept of all 4 years, and Jun and Aug of the post-election and midterm years; and 100% invested in all the other months not mentioned: Jan to April, July, Nov and Dec in the post-election/midterm years, and Jun and Aug in the pre-election years.
Vakkur found that the best seven months in the pre-election year and election years were Jan - April, July, Nov and Dec. The worst months in all the four election cycle year were May and Sept. Two more worse months occured in Jun and Aug of the post-election and midterm election years. All the other months not mentioned in these two years were considered average.
