Political uncertainty abounds.
But LPL Financial senior market strategist Ryan Detrick says these unknowns coming from Washington are unlikely to shake Wall Street. In fact, history suggests this setup is particularly bullish for stocks.
In year three of the four-year presidential cycle, for example, stocks typically stage a robust rebound from midterm year lows. Since 1950, the S&P 500 has been higher every time in the 12 months from the midterm year’s lows. On average, the S&P 500 has rallied 32 percent from midterm low to a year later.
“We’re not quite calling for a rally like that, but historically speaking, that pre-election year, year three of the presidential cycle where we are right now, tends to have an upward bias to it,” Detrick said on CNBC’s “Trading Nation” on Tuesday.
The 12-month stretch after the end of a government shutdown also typically leads to gains, says Detrick. A year after the October 2013 shutdown, the S&P 500 had added nearly 9 percent. The 21-day shutdown that ended January 1996 preceded a 21 percent rally in 12 months.
“The market really takes it in stride,” Detrick said. “Sometimes you get a little drop in confidence, sometimes a little drop in GDP growth, but normally you see that pick up the next couple of quarters. … Markets have a forward way of looking at things and normally, they’re looking past that.”
The January before a presidential election year is also a bullish signal, historical data suggests. Detrick says if these gains can last, the rest of the year is in good stead.
“Historically speaking, a good start to the year normally can have a good upward bias,” he said. “Without a recession happening, continuing confidence coming back, potentially a steepening yield curve, and record earnings and profits, at LPL Research we do think stocks will outperform bonds this year and we may get double-digit gains.”
The S&P 500 is up more than 4 percent this month. Since 1947, stocks have gained 3.8 percent on average in the January before a presidential election year.