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“ The boost the stock market has received since last October from the resolution of election uncertainty has now played itself out. ”
The bull market has lost a major support: The presidential election year cycle no longer calls for significantly higher U.S. stock prices.
On June 30, this cycle flipped from supporting better-than-average prices to lower-than-average ones. Assuming the future is like the past, this period of below-average prices we’ve just entered will last for more than a year.
Clients are surprised when I tell them this unpleasant news, since they’re under the impression that the third year of the presidential term — the one we’re in now, of course — has historically been the best for the stock market. Though they’re not wrong, this historical tendency comes with two major qualifications. The first is that the research documenting a strong third-year effect in the stock market focused on fiscal years beginning on Sept. 30, so the current third year has less than three months to go in any case.
The second qualification is that the above-average gains produced by past third years was front-loaded, as is evident from the accompanying chart. Notice that, while the Dow Jones Industrial Average
DJIA,
has produced well-above-average gains in the first three quarters of third years, it is a below-average performer in the fourth quarter. And this period of below-average performance lasts until the fourth year’s fourth quarter.
A genuine pattern
Increasing our confidence that this presidential-cycle pattern is genuine is the strong theoretical foundation on which it rests. Consider a 2021 study by Terry Marsh of the University of California, Berkeley, and Kam Fong Chan of the University of Queensland in Australia. They found that third-year strength traces to the resolution of uncertainty that occurs when the mid-term elections are over. (As you can see from the chart below, there is a similar pattern before and after the presidential election as well.)
Last year’s mid-term elections provided a perfect illustration of this pre-election uncertainty and the post-election resolution of that uncertainty. No one knew whether control of the House or the Senate, or both, would stay with the Democrats or shift to the Republicans. Sure enough, the stock market declined over the quarters leading up to that election — with the Dow losing 20.9%. But once that uncertainty was resolved after the election, the stock market shot up 19.8% over the subsequent three quarters.
It’s not just Monday-morning-quarterbacking for me to point this out, by the way. Last September, six weeks before the early-November mid-terms, my Barron’s column on this subject carried the headline “Why the Midterm Elections Could Mark the Market’s Bottom.” The actual bottom occurred last Oct.12.
Unfortunately, the boost the stock market has received since last October from the resolution of election uncertainty has now played itself out, and is now being replaced by the dampening effect of the uncertainty caused by the 2024 presidential election, which is now just 16 months away. Though this dampening doesn’t guarantee that the stock market will fall, it does mean that this major seasonal tendency is no longer boosting stock prices.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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