From OMC Financial Services:

An interesting market predictor that many investors keep an eye on is often referred to as “The Presidential (Election) Cycle Theory”.  Developed by Yale Hirsch, this theory basically states that, during the four year presidential cycle, the U.S. stock markets typically turn in their weakest performance in the year following the election of a new president.  According to Hirsch, “Presidential elections every four years have a profound impact on the economy and the stock market.  Wars, recessions and bear markets tend to start or occur in the first half of the term and bull markets in the latter half.”

Of course, this theory isn’t always correct but it is no secret that it is extremely difficult, if not impossible, to win the election in the face of poor economic conditions.  George Bush, Sr. learned that the hard way.  However, a look at stock market returns since 1833 show some interesting findings:

**Of the years in the four year cycle, only the year following the election has had more down years than up (24 vs.. 19)
**The first two year period generally underperforms the latter two year period
**The year prior to an election year generally has the most up years vs. down years  (33 vs. 11)
**In fact, the third year of the cycle has been positive 17 of the last 17 presidential cycles

What does this mean for the stock market in 2010, the second year of Obama’s term?  Unfortunately, that is difficult to say.  Since World War II, the second year of the presidential cycle has been up nine times and down seven.