Why midterm election years are tough for the stock market

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These efforts often contribute to strong stock market returns before presidential elections, when it is in the interests of presidents to stimulate the economy.

During the first half of a presidential term, however, when the White House and Congress are engaged in the mundane task of governing, it is often imperative to cut government spending or encourage (substitute “pressure” , if you will) the nominally independent Federal Reserve to raise interest rates and restrict economic growth. The best time to inflict pain is when a presidential election is still a few years away, at least according to theory.

As Mr. Hirsch told me at the time, it is good policy to “get the dirty stuff out of the economy as quickly as possible”, an exercise in fiscal and monetary restraint that tends to drive down stock returns during the second year of a presidential election. cycle.

That would be where we are now.

Through March, despite the market’s poor period this year, stock returns have been relatively strong during the Biden presidency, with the Dow Jones’ cumulative gain of 12.1%, well above the median of 8.1. % since 1901. Over the equivalent period, the Dow under Mr. Trump has gained 22.2%.

Both performances were well below the leaders, according to Ned Davis Research. The top three, from inauguration to March 31 of their second year in office, were:

  • Franklin D. Roosevelt in his first term, 89.2%.

  • Ronald Reagan in his second term, 48.2%.

  • Barack Obama in his first term, 31.1%.

What are we going to do with all this?

Well, the presidential cycle pattern suggests that the market will start to rebound at the end of this year and recover next year – the best, historically. This outcome is unlikely, however, if the Federal Reserve’s fight against inflation pushes the economy into recession, as some forecasters, including those at Deutsche Bank, are predicting.

I would not rely on any of these predictions or models. As an investor, I’m doing my usual thing, buying low-cost index funds that reflect the broader market and hanging in there for the long haul.

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