If stocks struggle in early 2025, you can blame the new U.S. president

By Mark Hulbert

Stocks often take a hit in the three months after Inauguration Day

No matter who wins the U.S. presidential election, the U.S. stock market most likely will struggle for a time after Inauguration Day in January.

Since the Dow Jones Industrial Average DJIA was created in 1896, one of its worst quarterly performances has been the first three months of a president's term in office, producing an average return of just 0.2%. That compares to an average gain of 1.9% in the other quarters of the presidential term. This overall pattern held up regardless of whether the incumbent political party won or lost.

A clue as to what causes this pattern comes from a study by Ned Davis Research. The firm found that there is an inverse relationship between a president's Gallup Poll approval rating and the stock market. This pattern provides strong headwinds for the stock market right after Inauguration Day, since that is when a president's approval rating is usually the highest over his or her entire term in office.

To be sure, there is a limit to this inverse relationship, as you can see from the red column in the chart: When a president's approval rating falls below 35%, then the market tends to lose. This has happened just 6.8% of the time since 1959; notable examples are near the end of Richard Nixon's time in office, just prior to his resignation, and the end of George W. Bush's term, at the depths of the Great Financial Crisis. President Joe Biden's current approval rating is 39%.

It is curious that investors would wait until Inauguration Day to realize that presidential candidates overpromise. Even if a new president doesn't have a bifurcated Congress making it virtually impossible to get anything done, simple math guarantees that government benefits can't be increased while simultaneously reducing taxes and the federal deficit. There's something about electoral politics that encourages us to engage in willful denial.

Of course, denial isn't an investment strategy. To make this point, Warren Buffett likes to tell the following joke:

"An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. 'You're qualified for residence,' said St. Peter, 'but, as you can see, the compound reserved for oil men is packed. There's no way to squeeze you in.' After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, 'Oil discovered in hell!'

"Immediately, the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. 'No,' he said, 'I think I'll go along with the rest of the boys. There might be some truth to that rumor after all.'"

The promises politicians make are the functional equivalent of that oil prospector's rumor. So even as you enjoy the bull market's ascent to seemingly daily new highs, keep your wits about you. Oil hasn't been discovered in hell.

In any case, it's important to emphasize that post-Inauguration Day weakness is based on an average; the stock market hasn't struggled in every post-inauguration period. Moreover, this particular tendency is just one of many stock market patterns, some of which are now telling a bullish story. For example, the gold-platinum ratio currently suggests that stock prices will be higher in 12 months. That is possible even if the first quarter of 2025 isn't a strong one for the market.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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10-02-24 1634ET

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