While every stock market and presidency is unique, there are certain patterns between the two that have proved relatively consistent over many decades.
The Presidential Election Cycle Theory, for instance, is based on data that shows that market performance in the latter two years of each president's term has tended to outperform the first two years.
There are many ways to look at the data. Some analyses go all the way back to Andrew Jackson in the 1830s, while others look only at recent decades.
In my opinion, the more valid ones are based on more recent market data because the economy, the stock market, and national politics have changed dramatically over the decades.
Western Trust Wealth Management compiled the data on S&P 500 index returns by presidential term year from 1950 to 2023. Consistent with other analyses, it finds that the combined returns of years three and four add up to an average gain of 24.5%, while the first two years see a combined gain of only 12.5%.
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The second year of a presidential term tends to be the weakest for the market
Importantly, the data show that year two of a presidential term -- the one we're entering -- is, on average, the weakest of the four for the stock market. The gain that year over the 1950-2023 period has been only 4.6%, far below the average annual S&P 500 gain of about 10%.
Why is that?
According to the Stock Trader's Almanac, it's due to the fact that wars, recessions and bear markets tend to start or occur in the first half of the presidential term. By contrast, peaceful and prosperous times tend to characterize the second half of a term. This can be coincidental, but also, presidents often focus on foreign policy concerns in their first two years (which can include wars) and then emphasize stimulating the economy (and by extension, the stock market) in years three and four when they begin to position their party for the next election.
All this data doesn't bode particularly well for the stock market in 2026.
Of course, it's impossible to predict what the economy and the market will do next year, and there's no reason not to be investing in stocks now, as, over the long term, the direction of the market is up and to the right.
