FA Center: Year 3 of a U.S. president’s term is bullish for stocks, but 2023’s gain is probably over by now

by | Feb 27, 2023 | Stock Market

Don’t expect much more out of the famous “third year effect” in the U.S. stock market. I’m referring to the seasonal pattern that keys off the presidential election cycle. The third year of the four-year U.S. presidential term historically has been far and away the best performer of the four. In fact, only the third year’s average return is sufficiently different than the all-year average to be statistically significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.

When measured in fiscal-years since World War II ending Sept. 30, for example, the Dow Jones Industrial Average
in third years has produced an average gain of 19.4%, more than quadruple the 4.6% average gain, respectively, in the first-, second- and fourth years. If these statistics were all we had to go on, we’d bullishly conclude that the seasonal winds will continue to blow in the direction of a higher stock market through this coming September, seven months from now. But what is not well-appreciated on Wall Street is that the third year’s above-average performance is front-loaded. That is, the strong rally that typically occurs during third years is often concentrated in the first few months of those years, leaving relatively litt …

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