This Market Cycle Is Predicting a Rough Year for Stocks

I thought it was a foolish idea at first...

You see, markets aren't supposed to be predictable. They're supposed to keep you on your toes... not follow consistent cycles "just because."

When I first began working in the markets, I was biased against cycles. But then I studied the data... and the logic. It started to make sense.

I watched it work in real time again and again. And I became a believer.

Like it or not, markets do work in cycles... both in the short and long term. And as I'll explain today, there's a powerful cycle in place right now.

It tells us that 2026 could be a rocky year. But you shouldn't give up on this bull market... because a tough 2026 will set the stage for fireworks in 2027.

The Presidential Election Cycle Points to Volatility

I'm talking about the presidential election cycle. It's a simple yet powerful way to see whether markets are likely to rally... or face a slowdown.

You see, not only do presidential elections bring uncertainty, but each stage of a presidency brings different policy aims. That means you can see predictable swings in markets based solely on where you are relative to the presidential election.

It sounds kooky at first. But it works with stunning accuracy.

Most people look at the election cycle using calendar years. But I've found the most extreme effect by looking at one-year returns beginning each year on September 30. With that in mind, here are the average stock returns for each year of the presidential election cycle since 1928...

As you can see, there's one great year to own stocks, two pretty good years, and one bad year. Here's why we think this happens...

Year 1 is good for the market. Simply getting past the election removes uncertainty, and stocks tend to do well.

Then, in Year 2, you get the worst performance. Stocks have lost money on average because of the uncertainty surrounding the upcoming midterm elections... Plus, the first year's big legislation changes have already moved markets by Year 2.

Then midterms happen, and uncertainty fades again. The president and his party start gearing up for the next election. Policy aims tend to be short-term and focus on the economy, which is good for markets.

That leads to incredible performance in Year 3, with average gains of 17%. And finally, the continued focus on economic policies in Year 4 results in another good return.

The important thing to note is that Year 2 tends to be bad, and Year 3 tends to be great. And unfortunately for us, Year 2 of the cycle started on September 30.

So you shouldn't be surprised if there's a market slowdown in 2026. That doesn't mean stocks will crash... But the massive gains we've seen in recent years could moderate.

The good news is that Year 3 is the best time to own stocks. That's likely when the boom that's underway could skyrocket toward a Melt Up peak... leading to the biggest gains.

In short, this rough framework shows we could see volatility next year – before a Melt Up finale in 2027.

This road map means you shouldn't feel pressured to throw in the towel when volatility shows up. And even in a Melt Up environment, volatility always rears its head...

Even Market Melt Ups Have Volatility

We saw this during the dot-com boom. The Nasdaq Composite Index went through five corrections of roughly 10% during its final Melt Up phase. Take a look...

That chart might make it look like a one-way ride higher. But it didn't feel like that in real time. There were plenty of opportunities to get spooked out of this final boom stage.

That means we can and should expect volatility in the coming months. But it's not a reason to assume the boom is turning into a bust.

We will get a bust eventually. But the election cycle shows that a slowdown in 2026 won't be that bust. It'll simply be setting the stage for the biggest gains in 2027.

Good investing,

Brett Eversole

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