The Pattern Driving 2025’s Volatility
In a way, what’s happening in the market this year was entirely predictable.
No, most political and economic observers had no idea of the draconian tariff regime President Trump would announce, which sent the market plummeting early this month.
We also couldn’t foresee Trump’s threats to remove the head of the Federal Reserve, which also sent stocks dramatically lower.
But if we had looked at how the market has performed under each new U.S. president over the past two centuries, we should have expected a very choppy and sideways market this year – exactly what we ended up getting so far.
I’m referring to the four-year presidential market cycle, a topic I’ve touched on before in this space.
That particular analysis looks at market returns in each year of a four-year presidential term, going all the way back to 1833 and President Andrew Jackson. It found that over those 192 years and 48 presidential terms, the market performed significantly better in the third and fourth years of each presidential term than in the first two years.
It also found that the first two years of president’s terms have been, on average, very choppy.
Here’s the Dow Jones Industrial Average return by year of each presidential term…
The pattern has been uncannily consistent throughout American history.
Ambitious Policies
Why does this pattern hold over so much time and so many presidents?
It’s probably due to uncertainty and rapid policy changes typical of many presidents’ first years in office, as every new president arrives in the Oval Office with grand ambitions in both their foreign and domestic policies.
This can give markets hope – but it can also cause disruption when things inevitably don’t go according to plan. And so far, Trump 2.0 is among the most ambitious presidencies in U.S. history, in terms of both domestic and foreign policy.
The president is questioning and testing long-standing U.S. alliances, he’s embarked on a massive deportation program, he’s dramatically downsizing the federal government, and he’s attempting to restructure an entrenched global trade system that has been carefully built over the course of eight decades.
As we might have imagined, such dramatic changes in a very short amount of time – the Administration is only 100 days old, after all – can easily unnerve the market and send it reeling.
Here’s another look at the four-year presidential cycle. This one shows data from the S&P 500 from 1928 to 2001.
This chart comes directly from an LW article I wrote on Feb 2, 2025. We can just reuse it.
Please put an arrow right where I’ve drawn one and label it “We are Here”
The pattern held for President Biden’s one term in office. The S&P 500 rose a modest 2.2% in his first two years and then soared during the last two years – up more than 50%.
If the pattern holds for Trump’s second term, investors can expect the market to move mostly sideways for a while.
That suggests that now is probably a good time to ease back into the market while many stocks are suddenly priced at a discount. Smart investors will want to be all in when the market takes off.
This article was originally published on this site
