As an equity investor, there are two important historical trends to be aware of that apply to 2015, both of which are positive for stocks: the Presidential Term Cycle and the Decennial “5” Pattern.
In looking at the performance of the Dow Jones Industrial Average historically during each year of the Presidential term, you can see on the accompanying chart that year three, which 2015 will be, is the best year by far of the Presidential cycle. Since 1897, the Dow has produced an average price return (i.e. pre-dividend return) of 12.2%. The median return is 14.4%. Perhaps more interesting is the lack of downside market volatility in the third year over the last 80 years. When factoring in dividends, the Dow has not lost money in the third year of a Presidential term since 1931. And that was in the middle of The Great Depression when there were obviously some other headwinds for the stock market.
This trend makes sense when you think about it. Politicians need to pull out all the stops to make sure that they and/or their party remain in power, which usually leads to economic and market-friendly policies. It has not mattered what the valuation of stocks has been coming into the third year or how the market has performed leading up to it or who has been in power. It is a very powerful trend with 20 consecutive positive years.
The second trend to be aware of this year is the Decennial “5” Pattern. For whatever reason, years that end in the number five have been unusually strong for the stock market when compared to all other years. Since 1897, the Dow has produced an average price return of 31.4% in years ending in five. The median return is 30.0%. To put the strength of this trend in perspective, the next best group of years is those ending in eight with an average return of 15.3% or less than half of what years ending in five have been able to produce on average historically. In terms of downside volatility, there has not been any. When including dividends, there has never been a losing year for the Dow in a “five year.”
This trend is most likely a statistical anomaly as it is a small sample size with only eleven years to analyze. Also, there is really no good reason for it (at least that we can think of), so the correlation is probably spurious. Regardless, given the strength of this trend historically, it is one to be aware of and monitor as 2015 plays out.