Judging by patterns over the past 179 years of stock market history, investors may be in trouble this year. The year after a president’s election tends to be the worst of his four-year term for the stock market.
Over the course of the past 25 post-presidential-election years, 15 bear markets began or were already under way. In postelection years from 1953 to 2011, the Dow Jones Industrial Average gained just 3.8%, on average, far weaker than the Dow’s annualized returns of 8% over the entire period.
This is not that surprising if you consider that presidents tend to push through painful initiatives—tax increases, spending cuts, aggressive foreign-policy moves—in the first half of a term, when they feel that they have the most political clout and long before they and their party will face reelection.
Notable exceptions to the dreary postelection investment scenario include the boom years of the 1990s, an unusual period of peace and prosperity, and 2009, the year that President Barack Obama began his first term and stocks began to emerge from the worst bear market since the Great Depression.
But I don’t expect 2013 to be one of those exceptions. I wouldn’t be surprised to see the start of a bear market, especially when stock prices have just about doubled, on average, since their 2009 lows, leaving little room for further strong gains.
Stock prices also are coming under great pressure as many CEOs are cutting estimates for both revenue and profits for the new year.
