If Stocks Struggle in Early 2025, You Can Blame the New U.S. President
As the world increasingly watches the political landscape in the United States, it becomes evident that the outcome of the upcoming presidential election will have implications that extend far beyond the political arena. Historically, the stock market tends to experience challenging periods right after Inauguration Day, regardless of the political party occupying the Oval Office. What does this mean for potential investors in early 2025?
The Historical Context of Stock Market Performance Post-Inauguration
Since the inception of the Dow Jones Industrial Average in 1896, one striking trend has emerged: the first three months following a president’s inauguration are often among the most challenging for the stock market. On average, the Dow yields a meager return of just 0.2% during this quarter. In stark contrast, other quarters during a president’s term produce an average gain of 1.9%. This trend shows that the stock market seems to contract in reaction to the political changes that accompany a new presidency.
The Approval Rating Factor
A pivotal factor influencing the stock market’s performance after Inauguration Day is the new president’s Gallup Poll approval rating. A study conducted by Ned Davis Research showcases a clear inverse correlation between a president’s approval and stock market performance. Traditionally, when a president’s approval rating is at its peak—shortly after taking office—the stock market tends to falter. This situation creates a challenging environment for investors, especially for those speculating on immediate gains.
The flip side is notable as well: if a president’s approval rating dips below 35%, the stock market generally enters a downward spiral. This scenario has occurred only 6.8% of the time since 1959, coinciding with some of the most tumultuous periods in U.S. history, such as Richard Nixon’s resignation and significant lows for George W. Bush during the financial crisis. Currently, President Joe Biden’s approval rating stands at 39%, positioning the market for potential apprehensions.
Investor Psychology and Political Promises
The uncertainty surrounding a new presidential term may stem from a willful denial among investors. As political candidates make promises during their campaigns, economic realities often paint a different picture after taking office. Even when a new president has a cooperative Congress, the notion of simultaneously increasing government benefits while decreasing taxes often clashes with economic feasibility.
Legendary investor Warren Buffett often illustrates this point through humor. He tells a joke about an oil prospector, who after being informed he couldn’t fit into heaven’s oil man section, cleverly yells, “Oil discovered in hell!” This statement reflects the allure of false rumors that can sway investor decisions. Buffet’s example serves as a reminder that political optimism may blind investors to underlying economic realities.
Looking Ahead: Market Trends and Patterns
Although historical trends suggest that the stock market tends to struggle post-Inauguration Day, it’s essential to contextualize this statistic. Not every presidential term has seen a slump; this pattern is merely an average, meaning that there are instances when the market thrived in the same period. Additionally, current indicators present a mixed bag of information—some trends point to positive market expectations.
The gold-platinum ratio serves as one such optimistic indicator, suggesting that stock prices may rise over the next twelve months, even if the first quarter of 2025 proves lackluster. This perspective highlights that while historical trends provide some guidance, factors influencing the market are as diverse as the often-complicated political landscape.
Conclusion
Investors looking to navigate the uncertainty following the presidential inauguration in January 2025 would do well to exercise caution. Understanding the historical tendencies of the stock market, presidents’ approval ratings, and the inherent risks in political promises can offer valuable insights for any potential investor. While there may be headwinds, the possibility of growth and opportunity remains on the table, encouraging investors to look beyond the initial turbulence.
Ultimately, as the political environment unfolds, staying informed and agile in investment strategy will be crucial for those anticipating the market’s next move following the inauguration of the new U.S. president.