October 2017 – September 2018 (i.e. this year) is the 2nd year of the “presidential cycle”, also known as the midterm election year.
According to conventional seasonality, the midterm election year is “supposed” to be weak (bearish).
However, when we look at the data from 1950-present, the midterm election year isn’t as seasonally bearish as you think.
As you can see, the S&P 500’s median return during midterm election years (October to next September) is 5.34%. The average is 3.35%, which means that a few large bearish cases are weighing down on the average (e.g. 1973)
Remember that the S&P 500 goes up 7-8% on average per year. This means that although the stock market is “weaker” during midterm years, it still tends to go up.
I would not pay too much attention to the stock market’s relative weakness during the midterm election year. As you can see from the following chart, the stock market’s performance during midterm election years fluctuates wildly.
The midterm election year is now mostly over. We only have 3 months until the midterm elections: August, September, and October.
Here’s how S&P 500 performs from August – October before each midterm election.
As you can see, the stock market’s forward returns from August-October during midterm election years tend to be mostly random. This suggests that the midterm elections don’t have a consistently bullish or bearish impact on the stock market.
Don’t put too much emphasis on the importance of presidential election cycles for the stock market. The stock market follows the economy in the medium-long term. Politics is mostly a sideshow. The economy is the signal, politics is the noise.
Most of our recent market studies are bullish for the stock market.