By Robert E. Quittner, Jr. CFP® & CMFC™
Investment Advisor Representative
[email protected]
Good morning, and welcome to August!
The first two months of summer certainly flew by. As we turn the calendar to August, it’s a good time to step back and see where the markets stand.
Back in January of last year, I wrote about managing expectations for the stock market in 2025. After the S&P 500 delivered gains of more than 20% in both 2023 and 2024, I suggested that expectations should be lowered and a more typical return of around 10% would be a reasonable outcome. As it turned out, the market pleasantly surprised us once again, finishing 2025 with a gain of more than 16%.
So far, 2026 has reminded us that the ride is rarely smooth. Volatility returned in late February through March with the Iran conflict and the S&P 500 briefly pulled back about 6%. April quickly erased those losses with a gain of 10.4%, followed by another strong advance of 5.3% in May. June and July changed direction again, giving back 2.3%.
While the Iran conflict has affected the markets this year, they are still up 8.6% through July. While we are on pace again for an up year, we are a long way from the finish line. Outside of the war there could be bigger influences at play like presidential cycles.
There is an old investing rule of thumb that says the stock market tends to perform differently depending on where we are in a four-year presidential term. But is there any truth to it, or is it just another Wall Street myth?
A 2009 academic study published in Mathematics and Computers in Simulation, titled “Mapping the Presidential Election Cycle in U.S. Stock Markets,” examined this question using sophisticated statistical techniques rather than simple historical averages. The researchers analyzed market behavior from the mid-1960s forward using advanced methods designed to identify recurring market patterns while accounting for changes in volatility.
Their conclusion was surprisingly consistent:
- The second year of a presidential term has historically been the weakest period for stocks.
- The stock market has often found its bottom during Year Two.
- Years Three and Four have historically produced the strongest advances.
You might be asking why this would happen. The theory is based on political incentives rather than economics alone. Early in a presidential term, administrations are often more willing to implement unpopular policies such as tax changes, spending cuts, or regulatory reforms. These actions can temporarily slow economic growth or create uncertainty for investors.
As the term progresses and thoughts turn to reelection, however, policymakers have historically become more focused on supporting economic growth. Fiscal stimulus, favorable monetary policy, and a stronger emphasis on consumer confidence have often boosted stocks during Years Three and Four.
Whether intentional or simply coincidental, the pattern has appeared often enough to attract the attention of both academics and market historians.
For the analytically minded, I have culled the historical returns across the last 50 years and numerous administrations in the chart below.
The main takeaway is not that we should try to time the market and trade based on the election calendar. Markets are influenced by many factors including inflation, interest rates, corporate earnings, global events, and investor sentiment.
Instead, the presidential cycle should be viewed as one of the many pieces contributing to market performance and not a singular prediction.
For long-term investors, the research serves as a reminder that periods of market weakness, particularly during the second year of a presidential cycle, have historically been followed by some of the strongest gains of the four-year cycle. Investors who remain disciplined during periods of uncertainty have often been rewarded when market conditions improve. History doesn’t repeat perfectly, but it often rhymes.
The research suggests that the stock market has frequently experienced its greatest challenges during the second year of a presidential term, followed by stronger performance in Years Three and Four. While no historical pattern guarantees future results, understanding these long-term tendencies can help investors keep short-term volatility in perspective.
Rather than reacting emotionally to market pullbacks, investors are generally better served by focusing on their long-term financial plan, maintaining a diversified portfolio, and remembering that some of the market’s best opportunities have historically emerged when uncertainty was at its highest.
If you would like to review how your portfolio is positioned, please schedule a call, Zoom, or in-person meeting with Peter, Jeremy, Kyle, Nick, Austin, or myself.
Enjoy your weekend!!
Rob