Upcoming Presidential Election Infographic Shows Election Impact on Stocks
Many investors understand that the stock market tends to move in cycles. Many aspects of life and nature work in cycles too, but stock market cycles can get so much attention in the media and in investor circles. The reason that market cycles can be so important for investors is that it is during the peaks and valleys of these cycles that many investors either lose thousands of dollars or make thousands more. Stock market investing is certainly not a steady activity, and it's improtant for investors to be aware of the various types of cycles that affect the financial markets.
While there are economic cycles at work, there are also political cycles that can affect an investor's portfolio. One of the most important political cycles is the term of office for the United States President. The US president is the head of state and the head of government in the country. They wield considerable power and influence as the leader of the executive branch in the most powerful country in the world, not to mention that they are also the commander in chief of the US Armed Forces. Due to such a high status, the changes and developments of the president can and do have an impact on financial markets.
According to the upcoming presidential election infographic produced by Fisher Investments, it seems that there is actually a demonstrated cycle that occurs with each US president that comes and goes. An intriguing finding was that stock market index returns are the highest in the third and forth years of a president's term. This trend showing higher average returns in the second half of historical presidents' tenures can be a useful guide for investors. If this historical data can be applied to future political cycles, then investors can expect to achieve higher index returns in the last two years of a president's office. Of course, past performance should not be taken as a clear prediction of future results, nonetheless the trend is striking and useful as part of the overall research for investors.
It's also useful to understand why there is a relationship between the president's term and the stock market index. Some commentators suggest that presidents tend to have more political power during the first and second year of their tenure, so they tend to push for more major legislation, thereby creating more risk aversion for investors. On the other hand, the final years of a president's term are generally marked by lower relative power and lower public approval, so presidents are less likely to introduce large reforms, and investors are thus more likely to take more risks and there is more market activity.