The following charts illustrate the irrefutable stock market power in the year before a presidential election. As you can see there is no other year quite like year three in the presidential election cycle in terms of consistent gains from stocks. The average return in year three is 16.9%, compared to 6.7%, -0.1%, and 5.9% in years 1,2,4 respectively. Year three also has the lowest standard deviation of the four.
“In the first seven months of the third year since 1960, Year 3 has returned 2.5% per month for a total of 20% real (after inflation adjustment). In contrast, the second five months after May have delivered an average return of 0.5% month, as does the fourth year of the cycle,” writes institutional money manager Jeremy Grantham of GMO. In other words, based on his study, the lion’s share of gains have already been seen for Year 3 of this presidential election cycle. The stock market performance in year three brings added meaning to the phrase “sell in May and go away.”