Stocks and the “Presidential Cycle”

Stock market statisticians are fond of spotting possible trends in the market’s ups and downs. One trend that may or may not be relevant this year is the “presidential cycle.” According to market history, stocks have risen in 9 of the past 11 presidential election years. Although that may be heartening news, it’s likely to provide small comfort to investors who are looking at a 15% year-to-date deficit in both the Dow Industrials and the S&P 500.

Other aspects of the presidential cycle are even gloomier for the short-term future. Statistics show that the first and second years of a president’s term are usually the worst in terms of market performance—and it doesn’t seem to matter whether the nation elects a Democrat or a Republican. Over the past 70 years, the stock market has averaged a gain of just over 5% in the first year of a president’s term; in the second year, the average gain was even lower, just under 2%. The third year is statistically the best in the presidential cycle, with an average gain of more than 20%.

Market mavens caution against relying too heavily on these statistical averages. With the market going through heart-stopping fluctuations every day, the best strategy is to ignore roller coaster rides and statistical cycles. Keeping your eye on the long term and adjusting your asset allocation to match your tolerance for risk is likely to pay off best in the long run, say the experts.