November 5, 2024

Anticipating Market Turbulence: The Potential Impact of the New U.S. President on Stocks in Early 2025

If Stocks Struggle in Early 2025, You Can Blame the New U.S. President

As we look ahead to the U.S. presidential inauguration in January 2025, investors would be wise to brace for potential turbulence in the stock market. The historical trend indicates that stocks often falter in the three months following Inauguration Day. This isn’t mere conjecture; it’s a pattern that has held true since the inception of the Dow Jones Industrial Average in 1896.

A Historical Perspective

On average, the performance of the Dow in the first quarter of a new president’s term yields a meager return of just 0.2%. In stark contrast, the average gains in other quarters reach about 1.9%. This trend remains consistent irrespective of whether the incumbent party retains power or a new party takes the helm. Such performance metrics should instill a sense of caution among investors as we approach a time of political transition.

Approval Ratings and Market Performance

Researchers at Ned Davis Research have uncovered a compelling inverse relationship between a president’s approval ratings and the stock market’s performance. This correlation suggests that new presidential administrations face strong headwinds almost exclusively following Inauguration Day, coinciding with the president’s highest approval ratings throughout their term.

It’s worth noting that when a president’s approval rating dips below 35%, the market tends to weaken. Fortunately, this has only occurred approximately 6.8% of the time since 1959. Noteworthy instances include the final days of Richard Nixon’s presidency before his resignation and George W. Bush’s term nearing the end of the Great Financial Crisis. As of now, President Joe Biden’s approval rating sits at 39%—a number already signaling uncertainty in investor confidence.

The Willful Denial of Reality

One must question why investors often wait until Inauguration Day to confront the reality that presidential candidates invariably overpromise outcomes. Whether the new president encounters a divided Congress or not, certain mathematical principles dictate that fulfilling ambitious government benefit programs while simultaneously cutting taxes cannot coexist within a sustainable economic framework. This fundamental reality can often be lost in the optimism of political promises.

Warren Buffett poignantly illustrated this folly with a joke involving an oil prospector. When given the chance to say a few words to attract fellow oilmen from a heavenly compound, the prospector simply declared, “Oil discovered in hell!” This whimsical anecdote serves as a metaphor for the dangers of believing in unrealistic promises made by politicians. Just as the oilmen rushed eagerly at the chance of riches, investors too can fall victim to denial that clouds their judgment. Remember, oil hasn’t been unearthed in hell—it’s a rumor devoid of substance.

Understanding Market Patterns

While it’s prudent to consider the historical data that suggests post-Inauguration Day weakness, remember that these insights are averages and do not depict every scenario. Not all presidential terms are beset by economic challenges, and some have led to prosperous market conditions despite initial struggles. Moreover, amidst the foreboding trends, other indicators suggest a more bullish outlook may be on the horizon. For instance, the gold-platinum ratio currently indicates that stock prices could rise substantially within twelve months, defying potential initial declines in early 2025.

Final Thoughts

In conclusion, those investing in the stock market should not be caught off guard as we approach the political shakeup of early 2025. Acknowledging historical performance trends, while also remaining alert to current indicators, will empower investors to make informed decisions during a turbulent time. A cautious but optimistic approach is advisable; keep your wits about you and don’t let overzealous political promises guide your investment strategies. The road ahead appears fraught with uncertainty, but there may also be opportunities waiting for those willing to navigate the complexities with a discerning eye.

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