Presidential Cycles & the Stock Market

Edward Mah - Nov 20, 2024

Donald J. Trump is set to begin his term as the 47th President of the United States on January 20, 2025. We expect a smooth transition of power, but many of you have reached out with questions about what this presidency could mean for the economy

On November 5th, a new president was elected, and Donald J. Trump is set to begin his term as the 47th President of the United States on January 20, 2025. We expect a smooth transition of power, but many of you have reached out with questions about what this presidency could mean for the economy.

While it’s hard to predict the future—especially considering some of the potential consequences of Trump’s campaign promises, like new tariffs on imports—it's helpful to look at the Presidential Election Cycle Theory to see if we can spot any patterns.

Understanding the Presidential Election Cycle Theory

The Presidential Election Cycle Theory, introduced by the "Stock Trader's Almanac" back in 1967, suggests that stock market performance tends to follow a four-year pattern based on the presidential term. According to this theory, markets often perform weaker in the first two years of a presidency, but rebound strongly and peaking in the third year, before cooling down a bit in the fourth year. Then, the cycle starts again with the next president.

This makes sense to many of us. Changes in presidential priorities can directly affect the economy and, by extension, the stock market. At the start of a new term, presidents usually focus on delivering their campaign promises and gaining public approval, which can boost economic confidence. By the second year, more challenging policies—like budget cuts or deficit reduction—tend to be introduced, often slowing economic growth and reducing market returns.

As we approach the next election cycle in the third year, presidents typically aim to stimulate the economy to win re-election or secure party support. This phase of the cycle is when markets tend to do best. The historical data backs this up: the strongest returns are often in the third year, with the second-best performance in the fourth year—no matter which party is in office.

Historical Market Trends and Data

Research from Charles Schwab, covering market data from 1933 to 2015, found that the third year of a presidential term usually produces the strongest stock market gains. Using the S&P 500 as a guide, here are the average returns for each year of the cycle:

  • First year: +6.7%
  • Second year: +3.3%
  • Third year: +13.5%
  • Fourth year: +7.5%

From 1928 to 2024, the stock market gained in 67% of those years, but interestingly, for those years that were the third year of a presidential term, the S&P 500 saw positive returns 78.3% of the time—a clear pattern. By contrast, in the first year of a presidential term, the market rose 58.3% of the time, and in the second year, 54.2% of the time.

What I Expect from a Trump Presidency

It’s reasonable to anticipate that Trump’s second term may not fit the usual pattern of the presidential cycle. His campaign promises and cabinet choices suggest a unique path ahead. Here’s what I think could happen in a few key areas:

Tax Cuts and Deregulation

We’ve already seen the markets react positively post-election, with expectations of a more business-friendly administration. Trump plans to extend parts of the 2017 tax cuts that are set to expire next year and is also proposing further corporate tax reductions. This could lead to faster economic growth in 2026 and 2027. Additionally, he’s likely to relax regulations, particularly around cryptocurrencies.

Tariffs and Trade

However, the benefits from tax cuts might be offset by proposed tariffs, which could raise costs for Canadian and U.S. businesses and consumers, potentially prompting retaliatory actions from trading partners. Trump has suggested tariffs of 10% to 20% on all imports, with even higher rates on goods from China. This move would likely be inflationary, adding an estimated 0.8 percentage points to inflation in 2025, while posing challenges for U.S. manufacturers who rely on global supply chains.

While Trump’s goal is to bring more manufacturing back to the U.S., many economists doubt this will happen, given the relatively high labour costs domestically.

Government Debt

While tariffs could bring in additional revenue, the proposed tax cuts are expected to widen the federal deficit, potentially driving up the government’s borrowing costs. This concern has already been reflected in a post-election rise in U.S. bond rates, which could also impact mortgage rates.

Immigration Policies

During his first term, Trump significantly restricted legal immigration, and I anticipate he’ll do the same this time around. His calls for mass deportations of undocumented immigrants have already resurfaced. These measures could have significant economic impacts, as limits on foreign-born labour might create workforce shortages—especially as Baby Boomers continue to retire. Higher labour costs due to stricter immigration policies could slow down economic growth.

The Role of the Federal Reserve

The Federal Reserve has already begun cutting interest rates, which the market had anticipated. However, if Trump’s policies drive inflation, the Fed may proceed more cautiously with future cuts. A slower pace of rate reductions could limit market growth in the short term.

Looking Ahead

We are in unprecedented times, and it's hard to predict how President Trump's policies will unfold, especially since many of his plans lack concrete details.

However, there are two things I feel certain about. First, Trump is very attuned to the stock market—it’s his scorecard. I expect he will adjust his approach to keep the market favourable, at least in the short term. Second, this is his last term in office. Without the pressure of re-election, he might prioritize short-term gains over long-term stability, which could have consequences for the economy beyond his term.

We’re Here for You

If you’re feeling anxious or uncertain about the current state of the economy, please don’t hesitate to reach out. We understand that times like these can be stressful, and we’re here to support you. Whether it’s answering your questions, discussing your investment strategy, or simply providing reassurance, we’re committed to guiding you through these uncertain times.

Think of us as your financial partner—we’re here to hold your hand, offer clarity, and help you make informed decisions that align with your long-term goals. Let’s schedule a meeting to review your portfolio and make sure you’re on the right track. Together, we’ll navigate whatever challenges the market may bring.