The fourth quarter of the second year of the presidential cycle tends to be strong
The fourth quarter begins next week, and this is especially interesting given it's the second year of a presidential cycle. This means midterm elections take place. The table below was in an article I wrote earlier this year. It summarizes the returns of the S&P 500 Index (SPX) in each year of the presidential cycle going back to 1949. The strong performance in the third year of the cycle is a stat many pundits are familiar with. Nothing jumps out as particularly interesting about the second year of the cycle until you break it down further into quarters.
Midterm Election Quarters
Stock market performance in the third year of the cycle has been remarkable, but it's this coming quarter when things look to really get going. The fourth quarter of the second year of the presidential cycle averages an impressive 7.81% return, with 15 of the 17 returns positive. One theory on why this would be the case is that people get more confident once it's more certain as to whether the sitting president's policies will or will not get implemented.
The chart below shows the typical path of the S&P 500 in the second year of the cycle. Here, you can see that all the gains during the year typically occur in the final quarter. On average, the index bounces around breakeven for three quarters and then surges higher over the last three months.
The Next Six Months Could Be Big for Stocks
When you break up each of the presidential cycle years by quarter going back to 1949, this coming quarter has the highest average return of them all. Furthermore, of the 16 quarters, it has the second highest positive percentage at 88.2%. The only other quarter that is comparable in performance is the first quarter of the third year of the cycle. In other words, if you're betting on the seasonality of presidential cycle years, don't wait until the third year of the cycle to buy stocks. Buy right now.
