Deviation From The Presidential Cycle Patterns

Starting right after the November 2024 elections, the SP500 was doing better than average.  I wrote here back on Dec. 5, 2024 about the differences in stock market behavior between having an incumbent party president (or replacement) winning versus a new challenger.  Usually the victory of a new challenger candidate means he gets to serve in what is counted as his first term.  President Trump's victory is unusual in that he was the challenger to the incumbent party candidate (VP Harrris), but he is now serving his 2nd term in office.

Generally speaking, the stock market reacts better at first to a new challenger winning the election.  Traders celebrate getting someone new, who will presumably fix all problems both real and imagined, and everything will be wonderful all the time.  That feeling lasts until around inauguration day, and then people realize that the new guy has been in office all day and we still have all the problems.  And as the new guy's first year proceeds further, a new president will typically "discover" that everything is even worse than he told us during the campaign, and that the "only solution" is whatever package of changes he wants to get through Congress.  Investors get discouraged hearing that things are bad, and the market suffers more on average in the first term of a new president.

I can remember when President Clinton took office in 1993.  GDP was growing 5%, but he nevertheless declared that the U.S. was in the "worst recession in 50 years", and that the "only solution" was a $20 billion package of pork spending and pet projects for campaign contributors.  Congress wisely said no to that, and the economy was fine.  Looking back now, $20 billion seems like such a cute little number.

With Bush43 in 2001, it was tax cuts.  With Obama in 2009, it was the Affordable Care Act.  New presidents all seem to declare that they have inherited a grave new catastrophe which only they are qualified to address.

By contrast, an incumbent who wins typically does not spend much time blaming his predecessor for things being bad, and so the stock market generally performs better in the first year of a president's second term than with a new president.  Eventually the performance all equals out later in the terms of each type of president, but for a while there is a significant difference, on average.

We are now seeing an even more significant difference thanks to President Trump's actions on international trade.  Because traders have never lived through a set of changes like what we are seeing now, it makes people uncomfortable because they do not know what to think about it.  So they sell their stocks and seek the safety of cash to assuage their uncertainty.  That is a normal human reaction.

The SP500 in 2024-25 was roughly matching the Presidential Cycle Pattern for first term presidents, which is the red line in the chart above.  And the SP500 was doing better for the first few weeks since the election than that average pattern.  That all changed with the price top on Feb. 19, after which the worries about tariffs really took hold.  Now we have a daily grind of new tariff moves and their corresponding countermoves by other countries.  Investors are not seeing any signs of resolution of these back and forth moves, and so they keep selling.  At some point this reaction will create opportunity to buy a great dip.  But until then, everyone should keep in mind the admonition about falling knives.

That red line average of 1st term presidents' average SP500 performance does show us a March to April bottoming process, and then an up move to a top in late May.  That represents investors recovering a sense of greater certainty, as the new administration finally starts finding its footing.  Then an even bigger selloff typically unfolds starting from that May top and lasting all the way to September of the first year.

One could argue that President Trump is more experienced, and is getting more done in his first few weeks in office than other new presidents.  So perhaps he is pulling forward the normal first year losses that would otherwise be due later in the year.  That is a reasonable argument, but I don't know how to prove whether it is correct until well after the fact.

My point in showing this chart again now is to help quantify just how different things are this time.  But you all already knew that a lot of things are different about Mr. Trump and his effects on the stock market.  So looking at average patterns of market behavior may not be the most effective tools at this point.