I hope you didn’t lose sleep over the election last night.
As the votes came in, one thing was for certain – the markets liked the odds leaning in favor of President Trump.
Whether you voted for him, or Kamala Harris, as traders, we want to focus on the dynamics of the stock market.
That’s why today is not going to be a victory lap for Trump.
We’ll continue to look ahead, past the knee-jerk reactions that could carry us into the end of the year, and look at what we can expect from the market over the four years of a Trump presidency.
Understanding the Four-Year Election Cycle
Each phase of the presidential term brings unique dynamics to the market.
When we separate out the market’s average returns by the election cycle, a few clear trends stand out that we can use as a guide ahead.
The chart below highlights the average S&P 500 returns across the election cycle since 1933, giving insight into what we might expect:
Post-Election Year (6.7%): This first year often features moderate returns as new policies and initiatives are rolled out, aiming to establish the administration’s agenda. For investors, this can mean a period of stability, with moderate growth as the market adjusts to the leadership.
Midterm Year (3.3%): Historically, the midterm year has been the weakest in the cycle. Policy
adjustments and the midterm elections themselves can introduce uncertainty, often leading to volatility. But for savvy investors, this can create buying opportunities, as markets tend to recover post-election.
Pre-Election Year (13.5%): Known as the strongest year, the pre-election period often sees the market responding positively to economic measures aimed at fueling growth. Historically, administrations may support market-friendly policies during this period, leading to above-average returns.
Election Year (7.5%): Finally, the election year brings varied performance, as the market assesses potential shifts in policy depending on election outcomes. While volatility is common, the market has shown resilience, typically rebounding in the months following the election.
We are at the tail end of this Election Year, set to head into the Post-Election Year. However, we are pacing well ahead of the average 7.5% return for the year, at 21.5% so far. Typically, we would see a rally into the end of the Election Year, but there’s a risk of mean reversion, even sideways movement after the initial rally, thanks to the greater than 20% rally in the first 10 months of the year.
Stock Market Returns Under a Republican President
With Trump’s victory speech, we can assume he will be the next President of the United States.
This is where things get interesting.
Under a Republican President, the Post-Election Year (2025) has underperformed, with a rebound in the Midterm Year and Pre-Election Year and finishing with a solid performance for Election Year.
Similar to what we see from the broader election cycle, with an emphasis on an underperformance in the Post-Election Year.
This time, we are shaping up for a potential underperformance next year as well.
The market is up strongly in 2024, as we just noted, and stocks are set to rip higher today as well. If this rally holds to the end of the year, 2024 will be one for the history books, setting up for a bit of a pullback and reversion to the mean with an underperformance in 2025.
Staying Focused Amid Political Shifts
The key takeaway? The stock market is extremely resilient.
Results of the election will indeed have a massive impact on the stock market. But it doesn’t mean we are in a do or die scenario for a bull market.
In fact, the election cycle shows we can expect strong results through the 4 year cycle, regardless of who is in the White House. We’ll look for the most likely year for weakness to come in 2025, based on the Republican Election Stock Market Cycle chart above.
Markets have seen many political changes over the decades, and they tend to reward those who stay grounded in their strategies, rather than get wrapped up in the short-term reactions.
So, as you head into this new election cycle, let’s stay focused on generating profitable trades instead of getting lost in the politics.
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