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Inside the Market Watch out Trump, the presidential cycle suggests markets won’t give you as much to brag about next year

The U.S. presidential cycle has unfolded perfectly for investors this year, which raises questions about how the stock market is going to perform in the fourth year of President Donald Trump’s first term in the White House – and what comes next.

The cycle is one of the quirkier market patterns, but it has attracted some influential market watchers over the years because it is underpinned by intriguing logic and persuasive historical numbers.

The logic: The S&P 500 tends to perform particularly well in the third year of a U.S. president’s four-year term because the president is thinking about re-election and will do whatever it takes to keep the economy – and corporate profits – humming.

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The numbers: According to Ed Yardeni, president and chief investment strategist at Yardeni Research, the S&P 500 has risen by an average of 12.8 per cent in the third year of a U.S. president, using data going back to 1928. That compares with average gains of 5.2 per cent in the first year of a U.S. president and 4.8 per cent in the second year.

The third year of Donald Trump’s first term is matching up with this quirky pattern, which suggests stocks will slow in 2020 as the next election approaches.

BRYAN R. SMITH/AFP/Getty Images

So far in 2019, Mr. Trump’s third year in office, the S&P 500 has risen 18.9 per cent, which fits in with the cycle’s long-term pattern. The success also puts the presidential cycle back in the spotlight after a mixed performance during Barack Obama’s third years: Although the S&P 500 rose 18.2 per cent in 2015, during the third year of Mr. Obama’s second term, it essentially stalled in 2011, the third year of his first term.

Mr. Trump, of course, has aligned his presidency with the performance of the stock market like no other president before him, in the sense that he believes that gains in the S&P 500 reflect his own economic policies.

“Today’s Stock Market is the highest in the history of our great Country! This is the 104th time since the Election of 2016 that we have reached a NEW HIGH. Congratulations USA!” he tweeted on July 3.

Mr. Trump has also tweeted that the stock market would be much higher if the U.S. Federal Reserve hadn’t raised interest rates as recently as December. He is now calling on the central bank to cut its key rate to stimulate economic activity and, presumably, the stock market.

“[Mr. Trump]'s in a tricky place. He knows he needs a good market,” Kevin McCreadie, CEO and chief investment officer at AGF Management Ltd., said in an interview.

Given this alignment between Mr. Trump and the stock market, it is tempting to bet that – love him or loathe him – Mr. Trump is good for stocks.

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But there are a few problems here.

One relates back to the presidential cycle: The fourth year of presidential terms is nothing special for the stock market. According to Yardeni Research, the S&P 500 has gained an average of 5.7 per cent during these years. That’s well below the average annual return of more than 9 per cent for the blue-chip index going back 90 years.

What’s more, this time there are many obstacles in the way of a continuing bull market, ranging from a trade war between the United States and China to signs of slowing global economic activity to fading stimulus from recent U.S. tax cuts.

Recent action suggests that the way forward isn’t clear. The stock market rallied in the first half of the year in anticipation of a dovish shift in Fed monetary policy, but it has backtracked since Friday after a strong U.S. payrolls report for June obscured the need for much-anticipated interest rate cuts.

In other words, investors are in a bind. The economy is either slowing and in need of rate cuts, or it’s doing fine and won’t get any help from the Fed – neither of which sounds promising for stocks. No doubt, Mr. Trump will want to take credit for another market rally. But if stocks sputter, he’ll be sure to point blame elsewhere, making the presidential cycle something to watch as his term winds down.

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