There is an interesting phenomenon that has repeated itself in U.S. history. After a two-term presidency, a recession tends to happen in the first term of a new president. Here’s the data since the Great Depression.
- Obama became President while the U.S. was in the throes of the worst recession since 1929. (Predecessor Bush Jr. served 2 terms)
- The U.S. entered into a recession almost immediately after Bush came into office in 2001. (Predecessor Bill Clinton served 2 terms)
- After Nixon resigned in 1974, Gerald Ford became President while the U.S. was in the depths of a recession.
- The U.S. entered into a recession less than a year after Nixon took office. (Preceded by Johnson).
- The U.S. recession was at its peak when JFK took office. (Preceded by Eisenhower).
- The U.S. went into a recession 6 months after Eisenhower became President in 1953. This was caused by a temporary post-Korean War related slump.
- Truman became President in 1945 in the midst of a small recession related to a temporary post-WWII slump.
- The most infamous of all was Hoover. His term was marked by the crash of 1929 and Great Depression. He was preceeded by Calvin Coolidge.
As you can see, there was a recession in the first term of EVERY SINGLE new presidency that was preceded by a two-term presidency. Trump’s presidency was preceded by Obama’s two-term presidency.
Does that mean the U.S. will experience a recession and bear market very soon?
Yes and no. As you can see in the above cases, the recession always began before the president came into office or in the first year of the president’s time in office. This time will be different.
Right now, our model states that the economy will continue to expand and that the U.S. stock market is still in a bull market. There are simply no signs of a recession on the horizon. Based on our model’s current trajectory, this economic expansion will continue for at least another year and most likely 2 years.
This means that if there is to be a recession under Trump’s (most likely single term) presidency, it will happen towards the end of his presidency i.e. 2019 or 2020.
Why this historical pattern exists
This pattern exists for a simple reason. Economic expansions have an average lifespan of 7-8 years (depending on how far back you go).
Presidents that hold office for two terms do so because the economy grew under their watch. Presidents that held office during recessions tended to be single-term presidents (like Bush Sr.).
So by the time a President leaves office after 2 terms, the economy has been growing for a long time. Since economic expansions have cycles, it’s very likely that the economy will go down in the next 4 years (i.e. during his successor’s presidency).
But here’s why we don’t use TIME and yearly cycles as a way of predicting recessions and bear markets.
- Yearly cycles are rough guidelines. While the average economic expansion lasts 7 years, they can go up to almost 11 years in the U.S.’ case. That’s a difference of 4 years, during which the S&P 500 can double or triple in value!
- If we expand our view beyond the U.S., we can see that economic expansions can last for much longer than 11 years! Developed nations like the Netherlands and Australia saw 24 and 25 years of economic growth, respectively.
- Historically speaking, economic expansions have become longer and longer while the peaks/troughs of the economy have become less extreme. There was a depression every few years during the 1800s. This is clearly not the case today. The smoothing of the economic cycle can be partially attributed to the counter-cycle efforts of the Federal Reserve.
The U.S. stock market and economy perform better under Democratic Presidents than Republican Presidents.
- The S&P 500 went up an average of 9.8% per year under a Democratic President and 6.7% per year under a Republican President.
- The U.S. economy’s growth rate was 1.55% higher under a Democratic President than a Republican President.
*Part of this difference is because Bush Jr. presided over 2 bear markets and recessions.
This is a rather shocking result. People usually believe that the stock market and economy should fare better under the Republican’s pro-business stance. There is actually a very simple explanation for this phenomenon and it has nothing to do with the 2 parties’ ideologies. (If anything, the pro-business policies of the Republicans should be more conducive to growth than the pro-social justice policies of the Democrats.)
When the stock market is crashing and the economic recession is at its most severe point, the majority of voters will vote for big government. When people don’t have jobs, they want the rich and businesses to pay for everyone else. So they vote Democrat. Then the economy recovers on its own and the stock market goes up for the next few years. When people get accustomed to the good times, the majority of voters turn pro-business. Because who doesn’t want to make more money and pay less taxes when the times are good? So they vote Republican. But because the economy has been growing for so long and economic expansions have cycles, the economy naturally starts to go down under a Republican President. Then the whole cycle repeats itself.
This pattern is evident in the last 3 presidencies.
- The U.S. economy experienced rapid growth under President Clinton. For starters, you can hardly call Clinton a Democrat. He was way more moderate than most Democrats today. He was probably too busy bangin’ interns to focus on social justice issues. 🙂
- By the end of Clinton’s 2nd term, the economy was red hot. So a Republican (Bush Jr.) won. The U.S. economy experienced 2 recessions and 2 bear markets under Bush Jr.
- Being angry at the state of the economy, the majority of voters elected Obama in 2008. Obama’s message was one of big government: massive fiscal stimulus plans, “let’s attack the evil rich/banks”, etc. But the U.S. economy and stock market still went up under Obama’s administration. This was not because of Obama’s policies but IN SPITE of Obama’s policies. Obamacare is a drain on small businesses (financially speaking), Obama’s financial regulation policies hurt banks, etc.
Keep in mind that this is an AVERAGE stock market and U.S. economy performance. The S&P 500 and economy can soar under Republican Presidents as well (e.g. Reagan).