The Presidential Election Cycle

The theory of the stock market "election cycle" holds that stocks tend to perform better late in a presidential term than in the immediate post-election period. The presumed causal dynamic is straightforward. Going into an election, the party in power wants a strong economy; consequently both GDP and stock prices tend to be strong in the last two years of a presidential term. Conversely, it is politically safest to restrain inflation early in a presidential term; if this requires a recession that lasts a year or so, it will set the stage for a nice economic rebound in the second half of the term -- just in time for the next election.