Since October of last year, the stock market has experienced a significant boost due to the resolution of election uncertainty. However, this upward trend has now come to an end.
One of the main factors supporting the bull market, the presidential election year cycle, no longer indicates a continuation of higher stock prices in the United States.
As of June 30th, this cycle has transitioned from favoring above-average prices to below-average prices. Based on historical data, if we assume that the future will align with the past, we can anticipate a period of below-average prices that will extend for over a year.
Many clients I work with are surprised when I deliver this unsettling news. They hold the belief that the third year of a presidential term, which we are currently in, has traditionally been the best for the stock market. While they are not entirely mistaken, it is crucial to consider two important factors.
Firstly, the research highlighting the strong third-year effect in the stock market focused on fiscal years commencing on September 30th. As a result, our current third year has less than three months remaining before it concludes.
Secondly, it’s worth noting that the above-average gains witnessed in previous third years were primarily concentrated in the initial three quarters. However, during the fourth quarter, the market performance tends to be below average. This below-average trend continues until the fourth quarter of the subsequent year.
In conclusion, the bull market has lost a significant source of support as it navigates through this period. While we are currently in the historically favorable third year of the presidential term, it is crucial to recognize the limitations and consider the ongoing shift towards below-average performance.
A Genuine Pattern
Increasing our confidence that this presidential-cycle pattern is genuine is the strong theoretical foundation on which it rests. Consider a 2021 study by Terry Marsh of the University of California, Berkeley, and Kam Fong Chan of the University of Queensland in Australia. They found that third-year strength traces to the resolution of uncertainty that occurs when the mid-term elections are over.
Mid-Term Elections Illustrate Pre-election Uncertainty
Last year’s mid-term elections provided a perfect illustration of this pre-election uncertainty and the post-election resolution of that uncertainty. No one knew whether control of the House or the Senate, or both, would stay with the Democrats or shift to the Republicans. Sure enough, the stock market declined over the quarters leading up to that election — with the Dow losing 20.9%. But once that uncertainty was resolved after the election, the stock market shot up 19.8% over the subsequent three quarters.
Evidence from Last Year’s Mid-Term Elections
Dampening Effect of 2024 Presidential Election
Unfortunately, the boost the stock market has received since last October from the resolution of election uncertainty has now played itself out and is being replaced by the dampening effect of the uncertainty caused by the 2024 presidential election, which is now just 16 months away. Though this dampening doesn’t guarantee that the stock market will fall, it does mean that this major seasonal tendency is no longer boosting stock prices.
More: Why this is not a good time to put more money into stocks
A Shift in Perspective
Given the uncertainties surrounding the economy and geopolitical landscape, caution seems to be the prevailing sentiment among investors. The inherent volatility associated with stock investments, particularly during times of global instability, necessitates a careful reassessment of one’s risk appetite. In light of these factors, it becomes imperative to scrutinize the current state of the stock market before making any further investment decisions.
The Necessity for Pausing U.S. Stocks
Citigroup strategists advocate for a temporary pause on U.S. stocks, highlighting the need for a modified approach to investment strategies. While this is not an indication that one should completely divest from stocks, it suggests a prudent reevaluation of the portfolio composition. By diversifying investments across different regions and assets, investors can potentially mitigate risks associated with an over-reliance on U.S. stocks.
Exploring Alternative Investment Avenues
In order to navigate today’s uncertain market conditions, it is crucial to explore alternative investment avenues that offer potential returns and stability. Rather than solely focusing on the stock market, diversifying one’s portfolio across different asset classes can provide a safeguard against market volatility. Investment options such as bonds, real estate, and commodities have emerged as viable alternatives that warrant consideration in the current market climate.
While stock investments have traditionally been seen as a lucrative avenue for wealth creation, the present circumstances call for a more cautious approach. By considering alternative investment opportunities and diversifying one’s portfolio, investors can navigate the current market volatility and potentially safeguard their wealth. It is imperative to exercise prudence and seek professional advice before making any investment decisions, as individual circumstances may vary.