US stocks have historically performed better in the second half of a presidential term than the first half. Also, there has been more variance in stocks performance in the first half of a presidential term than the second half.

The third year of a presidential term has historically been the best performing year for stocks.

Why is that?

First keep in mind the best opportunity to pass landmark legislation is in the first two years of a presidential term. In almost every case the president’s party loses power in the mid-term elections, and therefore loses the power to pass major legislation.

Now let’s think about the fourth year of a term, the election year. The president is trying to get re-elected or is trying to get his successor elected, and therefore will not try to pass any major legislation. The president’s party has (most likely) lost power in the mid-term elections to the opposition and therefore is not able to pass any major legislation. People of both political spectrums tend to be optimistic that their candidate will win the upcoming election. Summary of the fourth year, political gridlock/status quo, combined with a general feeling of optimism in both political spectrums. (Based on the polls, we do not have that optimism this year)

In the inaugural year of a term about 50% of the country is dissatisfied with the election results and is pessimistic. The other 50% of the country was really optimistic, but quickly becomes saddened to realize that the conservative or liberal that was elected is not nearly as conservative or liberal as they had hoped for. Also, as mentioned above the politicians are passing or talking about passing major legislation leading to uncertainty. Remember that legislation is some form of redistribution of money and/or property rights, and the markets do not like that.

The second year tends to be more of the same, perhaps without the degree of pessimism and/or gap between expectations and reality. Legislation is actually being passed. This means change and uncertainty, and redistribution. The markets do not tend to like those things.

Lastly, in the third year of the presidential term the president has lost power to pass major legislation because of the mid-term elections and the uncertainty of the upcoming election is still far enough away. This sets up for a perfect year of inaction, status quo, stalemate, whatever you want to call it; markets tend to like it.

Always keep in mind that politics is only one of a myriad of market drivers, and investment maneuvers should never be based solely on the political environment.