Research has shown that the stock market tends to follow the presidential cycle. The market usually goes up during the presidential election year, and 2016 has certainly followed form. The S&P is up some 11 percent this year and the Dow Jones has risen 14 percent. During the last 10 presidential election years, including this one, the market has been up eight times, and down only twice. That's an 80 percent probability. That's not bad odds. But what happens next?
Ned Davis Research long ago identified the presidential trend. Stock market average returns during the last two years of a presidential term are significantly higher than those during the first two years. A separate study by Marshall Nickles of Pepperdine University including data going back to 1950 also concluded that the stock market tends to be strong during a president's third and fourth years in office, but posts a relatively weak performance at the beginning of the term. The Dow Jones Industrial Average is an average of 7.2 percentage points higher during the third and fourth years of presidential terms than in the first two years, the study found. However, Nickles points out some exceptions to this trend in which performance was higher in the first two years of a presidential term, including 1985 to 1988, 1997 to 2000 and 2005 to 2008.
