Market Brief

A brief comment on the presidential cycle.

Cautionary note: This kind of analysis can provide a useful route map for understanding market cycles, but, as ever, there is no crystal ball. 

The Storm Before the Harvest: Why year two of the presidential cycle might be the market’s best kept secret

There is a rhythm to markets that often hides in plain sight: the presidential election cycle.  Not because elections change the laws of economics, but because they affect the timing of policies and incentives of policymakers. And incentives, in markets, are everything.

At the moment, we are standing in the eye of the storm – the second quarter of the second year – which history suggests is the most difficult period for markets in the four year presidential cycle, but perhaps also the point of opportunity.

The following bar chart shows the average quarterly performance over the full presidential cycle.  The diamonds show how often the market was higher in the period.  So, in the second quarter of the second year, the average US stock market return was -2.8% and the market performance was positive less than half of the time (47.4%).

S&P 500 Quarterly Performance by Presidential Cycle (1950-2025)

Source: Carson Investment Research, FactSet

The Anatomy of a cycle

While the current volatility may feel discouraging, historic data suggests that this period is often a precursor to growth.

Let’s consider the lows and the highs of the all the midterm years since 1950.

S&P 500 Midterm Election Year Declines & Recoveries
Every midterm year since 1950 – the low point (maximum drawdown in red) and the 1 year return following (in green)
Source: Oakham Wealth Management Ltd

What does this show?

• A Perfect Hit Rate: Every single midterm election year since 1950 (all 19 cycles) has been followed by a positive 12 month return.
• The Recovery Potential: The average 12 month return following the low point in the midterm year is +36.4%.

Why does this happen?

In history, there has been a powerful incentive for incumbent administrations to concentrate economic pain early and deliver relief later. The midterm year is where fiscal tightening, policy uncertainty, and weaker business confidence tend to converge.

Yet this uncertainty seeds the recovery. As midterms pass, policy visibility improves and the administration has every incentive to engineer favourable conditions towards the end of the presidential term. The pain is front loaded by design, and the relief tends to follow consistently.

Could this pattern hold under Trump?

A review of Trump’s presidency years mirrors this broader cycle: a sharp spring sell off bottoming around April, followed by a recovery.  In Trump’s 1987 book “The Art of the Deal” he advocates starting negotiations with bold, extreme positions to gain leverage, and in his actions as president reflects this, but he generally backs off if the implications of his actions threaten his popularity.  Hence the so called “TACO trade”, (“Trump Always Chickens Out”), has proven rewarding.

The Bottom Line: As ever in the world of investing, waiting for good news usually means missing the recovery. History suggests that a harvest follows the storm.

Disclaimer: Past performance is not a guarantee of future results. This document is for informational purposes only and does not constitute investment advice.