'A lackluster January through May': One chart shows what stock investors can expect in a crucial election year

2024 represents a crucial year for the stock market as the fourth year of the current presidential cycle gets underway, according to Bank of America. The fourth year of a presidential term is the second-strongest year for the stock market, with the S&P 500 historically posting solid median and average returns of 10.7% and 7.5%, respectively, according to data going back to 1928. Only the third year of a presidential term is stronger. One idea behind the solid performance during the fourth year of the presidential cycle is that the incumbent president will try to give the economy one last boost via fiscal spending to increase their chances of getting re-elected.

While the stock market has historically delivered solid returns and a win ratio of 75% during the fourth year of a presidential cycle, the gains are rather choppy and don't happen until the second half of the year. "Average monthly returns for the S&P 500 during Presidential Cycle Year 4 show a lackluster January through May, a June through August summer rally, a September through October pre-election dip and a November through December post-election relief rally," Bank of America technical strategist Stephen Suttmeier said in a Wednesday note. The strongest month of the year tends to be August, delivering an average gain of just over 3% with a win ratio of 71%. Meanwhile, December is typically the month with the highest chance of gains, with a win ratio of 83% as uncertainty around the presidential election subsides. Finally, May tends to be the weakest month of the year, with an average decline of 1.1%.

Despite the likely choppiness in the first few months of 2024, Suttmeier is constructive on stock returns thanks to big bases across major stock market indices that are on the verge of breaking out, as well as the high-yield market confirming the risk-on rally seen during the last two months of 2023. "Given big bases across many US equity indices and plenty of confirmation from other key indicators in late 2023, we believe that a tactical hangover in early 2024 should precede a solid 2024," he said.