To The Moon

1. The Year 3 Theory

The third year of the presidential cycle has historically been the best for the stock market. Going back to the start of 1945, the S&P 500 has risen an average of 15.9% during the last full year before an election, compared with an overall average of 9.2% for every year.

Most of that better-than-usual performance is packed into the first half of Year 3, according to data from CFRA Research. In the first three months of Year 3, for example, the S&P 500 has historically climbed an average of 6.9%, which is more than triple the 2.1% average for every first quarter over that span.

The last time a president was in Year 3, in 2019 under Donald Trump, the S&P 500 soared nearly 29%.

This year, there may be less appetite for big government programs that could stimulate the economy, because they could also potentially ignite inflationary pressures.

Averages also only tell part of the story. Across 23 completed four-year terms since 1925, the S&P 500 gain in Year 3 was the best seven times according to Doug Ramsey, chief investment officer at Leuthold Group — better than random, but not by much.

The last time a first-term Democratic president was in Year 3, as Joe Biden is now, was in 2011 under Barack Obama. That time, the S&P 500 ended the year virtually flat. Much of that was because of a steep tumble in the summer, triggered by worries about the European debt crisis and the downgrade of the U.S. debt rating by Standard & Poor’s.

“That was one of the few times where we really had nothing,” said Sam Stovall, chief investment strategist at CFRA Research. “Investors usually expect the president to try to ensure that he gets reelected by stimulating the economy.”

2. The Fourth Month Narrative

the S&P 500 index — a benchmark commonly used to measure how U.S. stocks are doing overall — is up around 7% for the year as we kick off the second quarter. It’s welcome news for investors, who have recently watched the financial markets grapple with a banking crisis following the collapse of Silicon Valley Bank, as well as continued interest rate hikes from the Federal Reserve.

Slow climb towards end April

- For the last 50 years, the Dow has averaged a gain of 2.09% during the month, with positive returns 66% of the time.

- When looking at the last 20 years, the Dow has averaged a gain of 2.18% during the month, with positive returns 85% of the time.

- As for the S&P 500, April and the remainder of the year have experienced gains 100% of the time since World War II when the index was down in the prior year and then up in the first quarter. (For background, the S&P 500 was down in 2022 and up last quarter.)

3. Don't Time The Market Concept

We've been told time and again that time in the market trumps timing the market. Getting in and out of the market could have investors missed out on the best days of a bull run. Below are some examples of the difference in ROI from the best days missed by timing the market over a period of 40 years.

Another important fact is that the US stock market goes up by 76% of the time in the last 95 years. What that means is that if you have stayed invested, you will be see gains of 76% on average and only a temporary drawdowns of 24% over a period the time.

However, if you short the market relentlessly like many online gurus nowadays, you will see profits 24% of the time but losses amounting to 76% in total. 

The worst case scenario is that people close theirpositions when breakeven after surviving the painful bear market and too afraid to ride the bull runs!

Bears win 23.2%, Bulls win 76.8%

Past performance is, as always, not a guarantee of how stocks will behave in the future. But looking at seasonality can give us insight into how stocks typically perform at certain times of the year — including the month of April and the third US presidential cycle but nothing beats the time to stay invested in the market.

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