After the 777 point decline in the stock market and the US on the brink of a recession, will the US stock market be able to provide investors with a year end rally? Yes, if past elections are any indicator.

The Presidential Cycle in past elections has provided a positive return US financial markets. The stock market has risen in the past as elections approach and the sitting administration tries to stimulate the economy. The idea is to have voters with jobs and feeling good about the economy when they go to vote. This will most likely allow that the party in power will stay in power.

From 1942 to 2006 an investor who purchased the Dow Jones Industrials 25 months before each election and sold at the end of November would have been rewarded with a gain.

But past markets have shown this can be a temporary effect. Typically, the two years following an election are often the hardest on the stock market. Stimulus packages need to be paid for and tough economic decisions need to be made.

This may prove to be the case again as a similar pattern emerges today. Currently US leaders are trying to revive our economic markets. Restrictions against short sellers in almost 800 stocks have helped to keep a temporary floor on the stock market. These restrictions have caused much volatility and numerous news stories, but the net effect to the markets have produced a negative or positive impact during the past few weeks.

After a stimulus package is approved and credit becomes available again, the markets may give investors a positive return as we head into the November elections. But the two year cycle may again prove true as the next president will need to figure out how to pay for the stimulus and bailout packages that are currently being proposed.

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