Why Midterm Election Years Are Hard for the Stock Market

These efforts often contribute to strong stock market returns before presidential elections, when presidents are most interested in stimulating the economy.

Yet in the first half of a presidential term, when the White House and Congress go about the mundane business of governing, there is often a pressing need to cut public spending or encourage (substitute “pressure” if you prefers) the nominally independent Federal Reserve to raise interest rates and restrict economic growth. The best time to inflict pain is when the presidential election is a few years away, or so the theory goes.

As 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 tightening that tends to depress stock market returns in the second year of a presidency. cycle.

That would be where we are now.

Through March, despite the market’s slump this year, stock returns have been comparatively good during the Biden presidency, with the Dow Jones gaining 12.1% cumulatively, well above the market average. 8.1% since 1901. In the equivalent period, the Dow under Mr. Trump gained 22.2%.

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

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

  • Ronald Reagan in his second term, 48.2 percent.

  • Barack Obama in his first term, 31.1 percent.

Who are we to do all this?

Well, the pattern of the presidential cycle suggests that the market will start to recover at the end of this year and will go up next year, the best ever. That outcome, however, is unlikely if the Federal Reserve’s fight against inflation plunges the economy into recession, as some forecasters, including those at Deutsche Bank, predict.

I wouldn’t count on any of these predictions or patterns. As an investor, I’m doing business as usual, buying low-cost index funds that mirror the general market and holding out for the long haul.

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