Chart of the Month – November 2018

The Four-year Presidential Cycle

We have written before about the echoes of the past. We examined the ten-year economic and stock market cycle (Juglar Cycle) last month. This month we are going to look at the four-year cycle which happens to correspond to the American presidential term. The four-year cycle however was already a topic of discussion in Europe long before the presidential cycle was considered relevant. In the 1920’s Joseph Kitchin identified a four-year business cycle that he attributed to the lag it takes businesses to react to the improvement of their commercial situation because of their increase in output due to the full employment of the fixed assets. Within a certain period of time (ranging between a few months and two years) the market gets ‘flooded’ with manufactured goods whose quantity becomes gradually excessive. The demand declines, prices drop, the produced goods get accumulated in inventories, which informs entrepreneurs of the necessity to reduce output. This process used to have significant time lags in information transmission but in today’s world of “just in time inventory management” it has become a flawed philosophy. However the advent of a four-year cycle of presidential terms in the most powerful economy in the world, over the past hundred years, may have supplanted the reasons identified by Kitchin for this phenomenon.

It is easy to see that the first year in office a new president would not influence the economy that much and often the heavy lifting is done in the second year which then bears fruit in the third year, resulting in optimistic messaging by the administration when they start looking for re-election in the fourth year. Should this cycle play out again in President Trump’s first term we can look forward to a strong equity market in 2019, followed by a weakening market in 2020. Coincidentally, this matches the data of the ten-year Juglar wave discussed last month.