Stocks often struggle in the first three months after a new president is inaugurated.
Regardless of who wins the U.S. presidential election, the stock market typically faces challenges following Inauguration Day in January. Since the Dow Jones Industrial Average (DJIA) was established in 1896, one of its weakest quarterly performances has historically been during the first quarter of a president’s term, averaging just a 0.2% gain.
By contrast, other quarters of a president’s term average a 1.9% return. This trend occurs whether or not the incumbent party remains in power.
A study by Ned Davis Research offers insight into this pattern, showing an inverse relationship between a president’s approval rating and the stock market.
The highest approval ratings typically occur right after Inauguration Day, creating headwinds for the market. However, when a president’s approval rating falls below 35%, the market tends to perform worse.
This has happened rarely—only 6.8% of the time since 1959, during events such as Richard Nixon’s resignation and the end of George W. Bush’s term during the Great Financial Crisis. Currently, President Biden’s approval rating stands at 39%.
It’s curious that investors often wait until Inauguration Day to adjust to the realities of campaign promises.
Even without a divided Congress, simple math makes it impossible for politicians to increase benefits while cutting taxes and reducing the deficit at the same time. Yet, election rhetoric often leads to unrealistic expectations.
This phenomenon is like a joke Warren Buffett tells about an oil prospector who convinces others that oil has been discovered in hell, only to leave in pursuit of the rumor. Similarly, the promises made by politicians are often equivalent to empty rumors. Investors should stay grounded even during a bull market’s rise.
It’s important to note that post-Inauguration Day weakness is an average and doesn’t occur after every inauguration. Other market trends, like the gold-platinum ratio, are currently bullish, suggesting stock prices may rise over the next year—even if the first quarter of 2025 is slow.
