The U.S. stock market reacts daily to a wide set of developments and news. Current issues like the possibility of war between Israel and Iran, the eurozone sovereign debt crisis, changing U.S. employment data, and household formation numbers all affect public confidence and especially investor sentiment.

We like to invest when things are good and improving. We don't when they're bad and seemingly destined to get worse.

Now the daily news is filled with the wrangling of Republican presidential hopefuls, and "Saturday Night Live" has a field day in producing parodies. This presidential election year gives us all yet another issue to focus on. What will the stock market do in response to the upcoming election? How should you make your own investment decisions in light of a possible presidential re-election or a change in administration?

You've heard that people vote their pocketbooks, and you probably do too. Do you really think, however, that who you vote for as president will affect the economy? The presidential election cycle theory holds that it might not make a difference. History shows that the stock market and the four-year presidential election cycle follow strong, predictable patterns regardless of the actual outcomes.

The presidential election-cycle theory was developed by Stock Trader's Almanac creator Yale Hirsch and came from an analysis of historic stock market data. Basically, a four-year pattern exists that corresponds to the four-year election cycle. On average, Hirsch says, the stock market has performed predictably in each four-year presidential term.

Year 1: The Post-Election Year. The first year of a presidency is usually one of relatively weak performance in the stock market. It's usually the worst out of the four.

Year 2: The Midterm Election Year. The second year is also usually one of below-average returns, even though it's better than the first. Bear market bottoms occur in the second year. As Hirsch puts it, "Wars, recessions, and bear markets tend to start or occur in the first half of the term." In another analysis done by Pepperdine University economics professor Marshall Nickles covering the years between 1942 and 2004, the market, on average, hit a bottom 1.9 years into a presidential term.

Year 3: The Pre-Presidential Election Year. The third year, or the year preceding the election year, is the strongest on average of the four years.

Year 4: The Election Year. Above-average stock market returns show up in the fourth year—the election year—of any presidential term.

According to investment management author Ken Hawkins, the average annual return of the Standard & Poor's Index between 1948 and 2008 shows these results by election-cycle year: year one, 7.41 percent; year two, 10.21 percent; year three, 22.34 percent; year four: 9.79 percent.

Keep those basic conclusions in mind while we cover just a bit of U.S. history that should help you think through these generalizations to answer your bottom-line question: What's going to happen in 2012?

After World War II, the ideas of English economist John Maynard Keynes were embraced by most Western people of influence. His ideas focused on things beyond the micro issues of supply and demand. Instead, he studied the macro view of economics—what governments could do to influence the economies of their countries to create stability and growth.

Keynes especially wanted governments to intervene through fiscal policies—government spending and taxation—in order to smooth out the peaks and troughs of business cycles. By the early 1960s, Keynesian theory was being taught at most major U.S. universities, and the federal government embraced it and has followed this view of the economy ever since. From that time forward, Washington has played an active role in affecting the direction of the economy.

The problem with the presidential election-cycle theory is that, like others, it explains what has happened but not what might happen. Also, keep in mind that since 1900, there have been 27 presidential election cycles. For serious statisticians, that is simply too small a number for anyone to be able to draw any valuable predictive conclusions about the outcome of future events. Another pattern of stock market returns has been detected in every mid-decade year throughout the 20th century: every year ending in a "5" was profitable1905, 1915, 1925, etc.

Given the general randomness of returns and the especially wild volatility that dominated the stock market in 2011, no astute investor would commit his portfolio based on any single theory and certainly not on one outside the realm of fundamental economic and financial markets research. Instead of blindly following a single investment theory, investors should continue to maintain a balanced portfolio of stocks and bonds and real estate and cash. It can be balanced as each investor sees fit—aggressively or conservatively—but it should give the investor the chance to realize gains broadly across different asset classes.

Don't look for a single silver bullet in your investment pursuits. Position your portfolios broadly and be prepared for continuing ups and downs. One of the key elements to keep in mind is the fact that since the start of our recession in 2008, many institutional and private investors have been sitting on the sidelines waiting for a chance to get back in. Whenever there is good news, investors pile back into the markets and stock shoot up quickly. Then, inevitably it seems, there is some bad news and it sinks again. Avoid this roller coaster and learn be to patient and to invest incrementally and prudently.

By the way, don't forget to vote.