Stocks, Bonds and the Election Cycle

This is one of those instances where I did some research and it showed absolutely nothing. Oh well, that’s how a lot of research goes. Still, I’ll post the results anyway.

I was curious to see if there’s a cyclical pattern to the equity risk premium. In this case, I wanted to see how stocks perform relative to long-term corporate bonds (the risk premium more often uses short-term bills).

I used the four-year Presidential Election Cycle. The average behavior of stocks during the period is well-known and I’ve written about it before. But what about bonds? I wasn’t sure if there’s a significant cycle involving corporate bonds.

As it turns out the answer is no. Here’s what the average cycle looks like:

The blue line represents the average return of the stock market over the four years of the election cycle. The data points are monthly. The first 12 are the mid-term year, followed by the pre-election year, election year and post-election year.

The red line is the same but for corporate bonds. In this case, there’s almost no variability in returns. It’s a line that rises about 0.5% each month, every month. There’s not one instance of an average four-month period when corporate bonds lost money. Any movement in the equity risk premium is almost entirely due to stocks.

Posted by on April 11th, 2017 at 2:26 pm


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