Since WWII, the third year of the four-year presidential cycle has been the best for the stock market, asserts Sam Stovall, chief investment strategist of CFRA Research in the firm's flagship newsletter, The Outlook.

Specifically, the S&P 500 gained an average of nearly 16% in the third year of a president’s term in office, rising in price in 84% of the time. Better yet, the market gained almost 20% during the third year of a president’s first term in office, posting a batting average annual gain of 92%.

One reason for this outsized performance may be the expectation that the president will attempt to propose legislation to stimulate the economy and increase the likelihood of reelection.

Investors therefore buy equities in anticipation of this stimulus. Granted, the market hasn’t advanced each time, since it fell 0.7% in 2015, 0.002% in 2011, and was flat in 1947, but it rose more than 20% seven times and surging 34% in 1995.

Since 1991, as far back as S&P has sector-level data, the S&P Composite 1500 rose an average of 17% in price during the third year, accompanied by gains in all sizes, styles, and sectors, led by consumer discretionary, health care, and information technology, while the laggards included the energy, real estate, and utilities groups. In addition, 99% of 80 sub-industries participating in at least six observations rose in price.

This year, investors are beginning to wonder if 2023 will become the fourth flat-to-down year, since recently hotter-than-expected economic and inflation readings will likely cause the FOMC to raise rates through mid-year, ending at 5.375%.

CFRA thinks that despite a volatile first half, investors will begin to “look across the valley” during the second half toward a pause in rate hikes and a turnaround in EPS growth.

Representative companies from this list (see table) of S&P 1500 sub-industries with the highest third year returns are: Akamai Technologies Inc. (AKAM), KLA Corporation (KLAC), MGM Resorts International (MGM), Vertex Pharmaceuticals (VRTX), Trimble Inc. (TRMB), Crocs Inc. (CROX), Cisco Systems (CSCO), and The Home Depot (HD).

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