Stocks soared on Wednesday as investors reacted to Democrats’ sweeping win in the midterm elections.
The Dow Jones Industrial Average finished up 3.2%, while the S&P 500 (SNPINDEX:^GSPC) gained 1.8%, and the Nasdaq Composite closed 1.4% higher.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
The surge seemed to take Wall Street by surprise as stocks had initially fallen when results started to come in on fears of a data center backlash. However, by the time markets had opened on Wednesday, those fears seemed fully absorbed. While stocks with exposure to the AI infrastructure market fell on Wednesday, the rest of the market soared as investors cheered decisive results, President Trump’s acceptance of his party’s defeat, and a renewed potential for interest rates and inflation to come down, and for the war in Iran to end, bringing down oil prices.
Stocks tend to go up after an election as investors appreciate the degree of certainty that’s been revealed, but Wednesday’s gain was especially strong. Does it signal more to come? Historically, stocks perform particularly well during the third year of a presidential term.
Let’s take a look at what history says about the current market cycle, and why it could be a great time to invest.
Image source: Getty Images.
What the stock market does in the third year of a presidential term
Historically, the third year of the four-year term is the strongest and most reliable period for the stock market. On average, the S&P 500 has gained 13.7% in the third year of the presidential cycle since 1980, and positive returns happen 78%-91% of the time, depending on the period that’s cited.
According to the Presidential Election Cycle Theory, the midterm election often leads to economic stimulus as incumbent administrations typically look to improve the economy ahead of the next presidential election. Historically, the Federal Reserve has also been more accommodative during the third year, though that may happen in this cycle. Finally, Wall Street also prefers the sense of political certainty coming out of the midterm election.
From the week before the midterm to the end of the following year, a period of about 14 months, the S&P 500 has gained every time in the last 19 cycles, a remarkable streak, with an average gain of 20.3%.
