Equity returns are historically strongest in the year following the midterms. Conspiracy theorists will judge that politicians in office focus on market-friendly moves that aren’t limited to government spending in order to stay in power. Whatever the reason, the effect is quite remarkable. Since 1960, the S&P500 has risen by 15.9% on average in the third year of a Presidential cycle, almost twice the 8% average across all years.

When equity returns in the year following midterms have been poor, the White House has often changed hands. In 2015 stocks were flat and Trump’s victory followed. Eight years earlier, modest losses in 2007 provided Obama with his opening, and the 2008 financial crisis confirmed the pattern.

Many people feel that a divided government is preferable since it requires both parties to compromise in order to achieve anything. With the House of Representatives shifting to Democrat control, legislation will require support from both parties. However, the numbers don’t support this, with such returns in the year following midterms 1% lower if one of the two houses of Congress is controlled by the party not in the White House.

So history suggests 2019 should be a good year for stocks.

But much about the Trump presidency is different. Looking at S&P500 earnings by year presents a different picture. Earnings growth in a midterm year is 8.3%, approximately the average. Earnings tend to be strongest in Presidential election years. That’s partly what drives good returns following midterms because investors look ahead to stronger profits the following year.

2018 S&P earnings are coming in at +22%, fueled by the cut in corporate taxes. That’s likely to be the strongest profits year of the four-year cycle, and it’s come two years ahead of what typically happens.

So it’s possible the election cycle effect may have already peaked; last year’s 18% rise in the S&P500 was looking ahead to this year’s jump in earnings. The new administration completed tax reform following its first full year in office.