Markets love patterns, and one of the best known links US share prices to the four-year rhythm of presidential elections. The presidential election cycle theory suggests that stocks tend to do worse in the first half of a presidency and better in the second half, especially in the year before the next election. It is an interesting piece of market history, but treating it as a rule can lead beginners astray.
What the theory says
The idea was popularised by market historians who noticed that, over many decades, US shares often had their weakest returns in the first two years of a presidential term and their strongest in the third year. The usual explanation is political. A new president tends to push through difficult or unpopular measures early on, while the economy is still adjusting. As the next election approaches, the administration has every incentive to support growth and keep voters happy.
The four years in brief
Year one follows the election, when new policies are introduced and markets digest the change. Year two includes the midterm elections, and history shows this period has often been choppy, with markets frequently finding a low at some point in the year. Year three, the pre-election year, has historically been the strongest on average. Year four, the election year itself, has tended to be positive but more mixed, as uncertainty about the result builds.
Why the pattern might exist
There are sensible reasons to think politics affects markets. Governments influence spending, taxes and regulation, and those all feed into company profits. Uncertainty around elections can make investors cautious, while its resolution can release pent-up demand. Our explainer on how US midterm elections affect stock markets looks at the year-two part of the cycle in more detail.
The limits
The biggest problem is the small sample. There have been only a couple of dozen presidential cycles in modern market history, so a few unusual years can shape the averages. Major events such as wars, oil shocks, pandemics and financial crises have often overwhelmed any election pattern. Interest rates, inflation and company earnings usually matter far more to share prices than where we are in the political calendar.
There is also a risk that patterns weaken once they become widely known, as investors try to act on them early.
How traders use it
Most professionals treat the cycle as background context rather than a trading signal. It might shape their expectations about volatility around midterms or make them more alert to political influence on policy in a pre-election year. They would still base decisions on the economy, valuations and price action. Our latest Morning Market Brief shows how much else is moving markets during an election week.
The beginner takeaway
The presidential cycle is a useful lens on how politics can influence markets, not a timetable for buying and selling. If a trade relies only on the calendar, it relies on very little.
Knowing whether you lean too heavily on patterns or on evidence is valuable self-knowledge. The Samuel & Co Trading Trader Assessment can help you see how you make decisions and where to improve.
