This is an interesting article on stock market performance throughout the 4 year presidential cycle.
The Strongest SP500 Months in Presidential Cycle
source: CNBC
There are some nice charts in the article, but the basic idea is that Oct-Dec is the strongest 3 months of the presidential cycle (the four years of a president’s term), AND the 3 quarters from the October before the mid-terms and June of the following year are the strongest 3 quarters of the presidential cycle.
Since 1950 the SP500 has averaged a 7.8% gain in the fourth quarter in the president’s second year. The next two quarters also average an increase of 4%+. In fact, those seem to be the only quarters in the 4 year cycle that average more than 4%, and the three quarters together seem to average approximately 19% (I’m estimating based on the charts).
You may be wondering why this is. It is fairly well known that the best time of year for the US market is Nov-May, which is where the common expression ‘Sell in May and go away’ comes from. If you take that basic seasonal pattern and add it to the increased certainty that comes with knowing what party will control congress for the next two years, it creates an environment where investors can more confidently predict what policies the government will be pursuing the next couple years. That allows investors to more accurately forecast (or at least believe that can more accurately forecast) which companies will do well.
There may be other factors of course, but that seems to be the most obvious explanation.
Then there’s this article about the Best Year in Presidential Cycle. That is of course year 3 (after the midterms), and the worst year is year 2 before the midterms. Since 1946, the average gain for stocks in year 3 is 17%, and in the January – October period before a midterm the average gain is only 1%, and about 4% for the year as a whole (which means almost all the gains come in November and December).
Of course, when you’re considering these seasonal patterns in your investing you should always take into account what the market is doing and the macro-economic environment.
In 2018 we have an economy that is very strong (though some think we may be at peak economic growth), and a Republican government pursuing deregulation and tax cuts (bullish), and increasing interest rates (bearish), among other things. Democrats are expected to take control of the House of Representatives which would slow or halt the more bullish policies and probably create gridlock. But if Republicans retained control of Congress it would probably be viewed as a bullish surprise event.
Also, the market has basically been in a trading range or weak bull trend for most of 2018 (consistent with the historical pattern). It seems to have been consolidating the gains from 2017 which is normal and healthy price action. The price consolidation and lower company valuations could be a favorable market context for a strong move higher, especially if the midterm elections turn out in a way that the market views as positive for businesses and the economy.