2026 Market Predictions: A Presidential Paradox

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While every stock market and presidency is unique, there are certain patterns between the two that have proved relatively consistent over many decades. Like a bad sitcom, the first two years often feature chaos, while the final act tries to wrap things up with a bow-though not always successfully.

The Presidential Election Cycle Theory, for instance, is based on data that shows that market performance in the latter two years of each president’s term has tended to outperform the first two years. It’s like a medieval knight’s quest: the first half is filled with battles, the second with feasts (if you’re lucky).

There are many ways to look at the data. Some analyses go all the way back to Andrew Jackson in the 1830s, while others look only at recent decades. But let’s be honest-comparing 19th-century politics to 2020s stock markets is like trying to explain TikTok to a Roman senator.

In my opinion, the more valid ones are based on more recent market data because the economy, the stock market, and national politics have changed dramatically over the decades. Also, who wants to trust a theory that relies on the wisdom of a man who probably didn’t own a smartphone?

Western Trust Wealth Management compiled the data on S&P 500 index returns by presidential term year from 1950 to 2023. Consistent with other analyses, it finds that the combined returns of years three and four add up to an average gain of 24.5%, while the first two years see a combined gain of only 12.5%. It’s like a rollercoaster: the first two drops are terrifying, but by the third loop, you’re screaming in delight (or panic).

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The second year of a presidential term tends to be the weakest for the market. Imagine a sitcom where the second season is just the lead character getting fired, then a montage of them crying in a coffee shop. That’s year two-uninspiring, but oddly relatable.

Importantly, the data show that year two of a presidential term – the one we’re entering – is, on average, the weakest of the four for the stock market. The gain that year over the 1950-2023 period has been only 4.6%, far below the average annual S&P 500 gain of about 10%. It’s the financial equivalent of a middle child: overlooked, underappreciated, and constantly second-guessed.

Why is that? According to the Stock Trader’s Almanac, it’s due to the fact that wars, recessions and bear markets tend to start or occur in the first half of the presidential term. By contrast, peaceful and prosperous times tend to characterize the second half of a term. This can be coincidental, but also, presidents often focus on foreign policy concerns in their first two years (which can include wars) and then emphasize stimulating the economy (and by extension, the stock market) in years three and four when they begin to position their party for the next election. It’s like a politician’s dating life: first two years are all “I’m not committed,” then suddenly “Let’s get married!”

All this data doesn’t bode particularly well for the stock market in 2026. But let’s not panic! The market is like a toddler-unpredictable, but ultimately, it’s going to grow up and be okay.

Of course, it’s impossible to predict what the economy and the market will do next year, and there’s no reason not to be investing in stocks now, as, over the long term, the direction of the market is up and to the right. Unless, of course, we’re all just living in a simulation created by a particularly cruel algorithm.

So, while 2026 might feel like the second act of a poorly written play, remember: the market has a habit of surprising even the most seasoned investors. And if it doesn’t, well, at least we’ll have a great story to tell.

🤷‍♂️

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2025-12-14 04:52