With the economy on the brink of a recession, the stock market down and multiple failures of both banks and brokerage firms, will the US stock market provide us with a year end rally? History says yes.
The Presidential Cycle has historically provided a positive return for the stock markets. In past, the markets have risen as elections approach and the current administration tries to stimulate the economy. The goal is to have voters go to the voting booths with jobs and feeling good about the economy. These increases the odds that the party in power will stay in power.
From 1942 to 2006 an investor who purchased the Dow Jones Industrials 25 months before each election and sold at the end of November would have been rewarded with a gain.
However, this can be a temporary effect. Historically the two years following an election are often the hardest on financial markets. Stimulus packages need to be paid for and tough economic decisions need to be made.
This may prove to be the case again as a similar pattern emerges. Congress and the White House are currently trying to revive our economy. Restrictions against short sellers in almost 800 stocks have helped to keep a floor on the stock market. These restrictions have caused much volatility and numerous news stories, but the financial markets have not really seen much of a negative or positive impact during the past few weeks.
After a stimulus package is created, the markets may give investors a positive return as we head into the November elections. But the two year cycle may again prove true as the next president will need to figure out how to pay for the stimulus and bailout packages that are currently being proposed.