Chart of the Day – Presidential Election Cycle Fallacies

Today’s post is a bit of a rant, so bear with me.

 

I have seen variations of this chart for more than a year now:

 

 

It shows the performance of the stock market during each year of the Presidency.  I pulled this one from the crossingwallstreet blog.  In his defense, he actually made the point that he would not base any investment decisions on this type of chart.  But many others don’t offer the same caveat, and offer up the chart as evidence for their view.

The argument that always accompanies this chart is that the administration will naturally implement policies and take action to promote re-election chances as the election draws near. As a result, the 3rd and 4th years of a President’s term have historically offered better returns than the 1st and 2nd year.  This is the classic case of creating a story to fit a chart, rather than a chart telling a story.

What is the sample size used here?  This chart was created with 115 years worth of data.  That’s fewer than 30 data points, based on a president every 4 years.  As a result, a couple large data points, like the strong rallies in 1995 and 1996, can have a disproportionately large impact on the average of the entire data set.

Moreover, it is a widely recognized fact that policies implemented by government generally take a long time to have an impact.  Regardless, markets are complex enough, with enough varying push-pull factors, that assigning value to the year of the presidential cycle is the ultimate snake oil to me.

My main point is this:  don’t accept the conclusions of each pretty little chart.  The beauty of the internet is that it has allowed for the wide dissemination of charts like this.  But it also allows for the widespread adoption of nonsense conclusions as a result.

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