How Stocks React in an Election Year

NEW YORK (Stockpickr) -- Over the past 100 years, a clear pattern has been in place. The stock market has tended to trade in a similar fashion in each of the four years of a presidential cycle -- that is to say, first-year results are similar from term to term, and so on. The logic behind such rational price action is quite simple: Presidential economic policies tend to follow predictable patterns that boost the chances a president (or his party) will stand a better chance of re-election.

As we head into the final year of the four-year cycle, what should investors expect? Well, the historical data suggest we'll get a nice rally, although recent stock market activity seems to be held hostage to some unusual factors that are impacting this historical cycle.

The first year of a new term is usually characterized by policies that represent a break from a predecessor's policies, usually based on populist-oriented promises that were made during the campaign season. This "feel-good" environment has, on average, generated an 8.8% gain in the first year of a new presidential cycle, according to veteran Wall Street strategist Mark Hulbert. The "year" in question is actually Oct. 1 to Sept. 30, as that is the period in which investors tend to start thinking about the impact of a new regime.

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Of course, the first year of President Obama's term, 2009, was extremely unusual. The S&P 500 stood at 1160 at the end of September 2008, plunged by 900 by year's end and kept falling all through the first six weeks of President Obama's first term to 675. Yet the index managed to rebound to around 1050 by the end of September 2009. That 10% overall drop stood in contrast to a similar-sized projected gain.

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