How the end of a US Presidential Term often means Solid Market Performances
Investors have all kinds of theories about how the presidential election cycle affects the stock market. In truth the theories don't really matter all that matters is that they can spot a trend to make money. There is a clear trend that the market is strong in the last year of a president's term. That is really all that investors need to know in order to be able to make money, the reason why don't concern them at all.
Generally the last year of US presidential terms are very strong for the stock market
according to recent research by FI.
The reason that is usually cited for this is that since the last year is an election year the president has an interest in making sure that the economy is as strong as possible. Even if he is not running again
himself he is still going to want to see his party candidate do well. As a result the president usually takes steps to stimulate the economy during his last year. This can be in the
form of tax cuts or new spending. Either way it does seem to work since the historical data shows that the last year of a presidential term means a solid market performance.
One other trend that has come up but is less pronounced is that the economy also does better when the incumbent is re-elected. This is less obvious since the market does tend to be up regardless of who wins but it is usually up by more when the president in office stays there. This is important if you are planning to invest based on the historical data since in 2012 there is a president running for re-election. How good his chances of winning are is something that you will need to assess for yourself but if he does win it should be good for the market.
There are a lot of people who would tell you that the reason that the markets tend to be strong in the last year of presidential elections is because people expect them to be. In large part the market is a reflection of what people expect the market will do, if they think it will be strong it probably will be. This doesn't really affect the usefulness of the historical data for making investment decisions but it is something to keep in mind.
Something else that you are going to want to keep in mind is that the trend doesn't always hold. Over the last twenty one elections since 1928 the market has been down in only three election years. But two of those where in the last three elections. This probably has more to do with other things that were going on in the market at the time. However since there are real issues facing the economy this time around it pays to be careful.