Doc's note: If you turn on your TV, it won't take long to see a political ad begging you to donate to a campaign for the upcoming midterm elections. And while you're probably already tired of seeing these ads and the signs dotting your neighbors' yards, you might not know that the cycle we're in today can be a boon for your portfolio.
As Brett Eversole explains, the next 12 months tend to be the best for returns...
This bull market feels unstoppable...
Over the past few years, we've seen stocks weather storm after storm – everything from geopolitical tensions and energy shocks to tariffs and wars. But as the hits continue, stocks keep marching higher.
The market's resilience has been especially surprising over the past year.
We're finishing a 12-month period that's typically bad for U.S. stocks. But you'd never know it. Prices have soared double digits over that stretch.
Not only that, but history shows the next 12 months tend to be the best for returns. The reason has to do with an important political cycle... And it tells us that the stock boom will likely continue.
Let me explain...
The Presidential Election Cycle Is About to Turn in Our Favor
The person sitting in the Oval Office matters less to the stock market than you probably think.
Sure, presidents can set policy goals and push legislation. But those are slow changes. And it takes even longer for their effects to trickle into the real economy.
What's more important than who is in office is where we are in their four-year term. This is known as the presidential election cycle.
It might seem odd at first... But stock returns have formed a historical pattern based on the specific year of a president's term.
The first year tends to be good. The second year is terrible. The third year is great. And the fourth year is good again. The differences are even more pronounced if we use the government's fiscal year, ending on September 30, instead of a typical calendar year.
Here are the returns of each year in the election cycle since 1928, using that method...
This is one of those ideas that seems too simple to be true. Yet, for nearly a century, the presidential cycle has been a powerful indicator of stock performance.
And it makes sense if you think about it...
In Year 1, the election has just ended. The market has certainty about who's in charge, so prices tend to rise.
Year 2 brings uncertainty back with the midterm elections. Historically, that's the toughest part of the cycle.
Then, Year 3 comes along. The president starts gearing up for the next election... which means pushing policies that focus on the economy. This change in posture leads to the biggest gains for investors.
In Year 4, the market enjoys the same pro-economy stance, but election uncertainty weighs on returns. The result is another year that's good, but not great.
We're now entering the end of Year 2. That's the only year of the election cycle that typically sees market losses. And yet, stocks have risen about 15% since the end of last September – the same performance as term Year 3.
That's another feather in the cap of this bull market. It seems like no matter what comes around, stock prices keep marching higher.
The good times won't last forever, of course. Every great bull market ends eventually. But history shows we shouldn't expect this one to end soon.
Next week, we'll begin the best year for stocks based on the election-cycle indicator. We've typically seen gains of around 15% in Year 3.
With that historical backdrop on our side, we want to stay bullish right now.
Good investing,
Brett Eversole
Editor's note: Elections aren't the only thing entering a new cycle. According to Brett, we're entering Phase 2 of the AI boom. And Brett believes the market could reprice the entire AI trade. That could lead to some huge winners and losers.
