This analyst has a message for investors: Enjoy the party until inauguration day

Investing.com -- Investors can savor the current market momentum but prepare for a potential shift after January's inauguration of Donald Trump, Tom McClellan said in the new McClellan Market Report.

In a report released Friday, McClellan outlines how market behavior aligns with presidential transitions, based on decades of research into the Presidential Cycle Pattern (PCP).

More concretely, the analyst cautions that while the stock market is currently enjoying a bullish phase, this optimism is unlikely to last past January's inauguration. The market often celebrates presidential changes but cools off as reality sets in.

“When a new party candidate is elected, Wall Street typically celebrates because, ‘Hooray! Change!’” McClellan writes.

“But that celebration typically wears off by around inauguration day, when people realize that the new guy has been in office for a whole day and he has not fixed everything yet,” he added.

This shift in sentiment, McClellan explains, is tied to uncertainty surrounding a new administration’s policies and the inevitable political battles with Congress. “Wall Street hates unknowns,” he emphasizes.

McClellan also identifies a repeating theme with first-term presidents, noting that they spend much of their early tenure addressing inherited crises, which can dampen market sentiment.

“Each week there is a new revelation of some crisis condition left to him by the prior administration, and a claim that the ‘only solution’ to these myriad problems is whatever package of taxes, tax cuts, spending, reform, etc. that the new guy wants to get Congress to pass,” he states.

This can make investors less willing to commit capital, further pressuring the market.

Looking further ahead, McClellan points out that broader patterns within the PCP suggest that while the immediate post-election period can be rocky, markets tend to stabilize and trend higher by the third year of a presidential term.

“By the time we get to the 3rd year of a presidential term, the big differences we see between 1st and 2nd term presidents largely disappear, and the market trends higher almost universally in 3rd presidential years,” he explains.

“And by the time the next election year arrives, the early differences in performance between 1st and 2nd term presidents get made up. So any upcoming difficulties for the stock market during 2025 will be forgotten once 2028 gets here.”

McClellan says that expectations surrounding Trump's upcoming inauguration are rooted in optimism about significant economic changes. Investors are hopeful that his administration will bring greater efficiency, reduced taxes, lower spending, and deregulation, leading to robust economic growth.

However, the analyst cautions that if Trump succeeds in cutting government deficits and achieving a balanced budget, it could historically signal bearish conditions for the stock market. He also warns that overconfidence in such positive market outcomes could set the stage for unexpected reversals.

“In other words, enjoy the party until inauguration day, and then get ready to put on your trading shoes,” the analyst concludes.

Source: Investing.com