Trump bucks typical stock market 'presidential cycle' with strong gains to start term

  • The stock market tends to enjoy its best years during the third and fourth year of a president's term.
  • But Trump could suffer from the presidential cycle in reverse: a front-loaded economy that could be on the brink of recession just before the next election.
  • Rising rates are already beginning to bite into the stock market and the economy, as home and auto sales appear to have stalled.
President Donald Trump addresses a 'Make America Great Again' rally in Topeka, Kansas, on October 6, 2018. 
Nicholas Kamm | AFP | Getty Images
President Donald Trump addresses a 'Make America Great Again' rally in Topeka, Kansas, on October 6, 2018. 

Given the reality that the Trump presidency has defied many long-held beliefs about the highest office in the land, it seems possible that it may also defy convention when it comes to the impact this president may have on the financial markets and economy.

The stock market tends to enjoy its best years during the third and fourth year of a president's term, a tendency the Stock Traders Almanac has quantified for decades, chronicling the impact of the so-called "presidential cycle." Since it has been widely assumed that most presidents tend to make hard decisions, especially about the economy, early in their time in the White House, it has been observed that stocks do more poorly in those first two years than in the second two.

It can be explained in this manner: Just when the economy needs a little boost, conveniently some would say, a year or so before election time, any administration tends to kick-start the economy with some fiscal stimulus. Whether it be a hefty tax cut, some road and bridge construction in key geographic locations, extra defense spending, or anything that "primes the pump" as economist John Maynard Keynes described it. Presidents like to kick it up a notch to ensure voters are happy come November.

Indeed, when that doesn't happen, there can be dire consequences for the incumbent. George H.W. Bush was forced to raise taxes, breaking a key campaign promise, even as the Federal Reserve was raising rates, toward the end of his first term. The result was somewhat predictable. With a recession dogging him in 1991, Bush, also weakened by Ross Perot's third-party bid, lost to Bill Clinton. Clinton came into the White House at the bottom of the economic cycle and rode the wave for eight years.

For President Donald Trump, who was elected during the seventh year of an economic recovery, his first bid was to pass a massive tax cut that appears to have shifted the economy into ultra-high gear, while also increasing government spending dramatically in his first two years. Dousing a smoldering economy with two types of gasoline, the Trump Administration got what it wanted, stronger growth, soaring corporate profits, a booming stock market and, to a lesser extent, rising wages.

In reverse?

With that boom, however, comes rising interest rates from the Fed, which is "normalizing" the ultra-low interest rate policy that was needed at the depths of the 2008 financial crisis. Rising rates are already beginning to bite into the stock market and the economy, as home and auto sales appear to have stalled. Add to that the administration's conflicting foreign and trade policies, which are helping to weaken overseas economies, on which the U.S. relies for additional growth, and you have the makings of a potential problem for Trump's re-election bid, however early it might be to start with 2020 predictions.

He could suffer from the presidential cycle in reverse: a front-loaded economy that could be on the brink of recession just before the next presidential election. While it is also possible that a secular, or long-term and structural, economic recovery and bull market will carry forward for several more years, that is not the consensus among many economists.

Many believe the U.S. economy will run out of gas (possibly with the help of higher gasoline prices, too) within the next 18-24 months, possibly sooner if a full-blown trade war with China leads to a global market and economic meltdown. It won't likely affect the Nov. 6 midterm elections, but it could hold sway in the general two years from now. The presidential cycle has been pretty reliable over the course of the last several decades.

Unless this administration has more cards to play, Wall Street may bid "2020 No Trump" when it lays its cards on the table two years from now.