Wow, what a year the stock market has had so far! Confounding the bears, stocks have surged higher in the first quarter of 2012 despite worldwide economic fears. Domestic data has clearly indicated that the United States has turned the corner and is on the way to a solid recovery. Even the beat down housing market is showing signs of bottoming. Combine these factors with 2012 being a presidential election year, and it paints a very bullish stock picture.
While studies indicate that stock market performance during the presidential election year tends to be above average, the other three years of the cycle have historically shown a unique pattern. Let’s take a closer look.
Weak Stock Market Following Election
The post-election year (which will be 2013) has historically been a weak one for stocks. This is the year that the new president tries to implement his election year promises. These changes may result in uncertainty and the market hates uncertainty.
The next year of the presidential election cycle, known as the midterm election year, is generally better than the post election year, but not by much. Bear markets have historically started in the first half of the term.
The pre-presidential election year has historically proven to be the best for the stock market. It has been the strongest year of the four-year presidential election cycle.
Stronger Market Performance under Democratic Leader
What happens after the election? Does it matter to the stock market if a Republican or Democrat takes control of the White House? Conventional wisdom would state that a Republican presidency would be better for the stock market due to the Republican’s pro-business stance. However, the facts prove this wrong. Studies have shown that the stock market has better performance under Democratic presidents than Republicans. This is particularly true with small cap stocks. However, it’s critical to note for traders, volatility has historically been higher during Republican administrations than Democratic ones.
If these cycles continue into 2012, we can look forward to a bullish yet volatile election trading year!
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