Don't expect the markets to crash in 2010 (if the Presidential Election Cycle Theory holds)
I came across an interesting statement in BusinesWeek magazine (which is much better now that Bloomberg has taken control of it BTW) yesterday. The statement that I am referring to was made by the famous market pundit Jeremy Grantham, who is not a raging bull by any stretch of the imagination.
He doesn't expect to see a crash in the stock market any time in 2010. According to Mr. Grantham, there has not been a serious decline in the stock market during the third year of the Presidential cycle since 1932.
That interesting comment spurred me to do some research on the Presidential Election Cycle Theory. The theory was originally developed by the author of the Stock Trader's Almanac, Yale Hirsch. It is quite interesting, though I don't think that any theory like this can be taken as gospel.
Here's a table from a SeekingAlpha article from a couple of years ago (link) on the subject that breaks down the stock market's returns during the four year term of Presidents.
Here's a chart that illustrates the same pattern:
As you can see, the third year of a President's term in office for some reason usually yields the best returns in the stock market. I suppose that this trend makes some sense if you think about it.
New Presidents likely try to cram the promises that they made during their election campaign, such as Healthcare Reform, down the country's throat during their first two years in office and then worried about re-election they tend to focus their efforts on pumping up the economy as much as possible during their second two years to make sure that they stay in office.
Will this theory hold in 2010? I suspect that for the most part it will. The S&P 500 is essentially flat YTD. While I expect a lot of volatility along the way, I wouldn't be surprised if we ended the year basically flat as well. It doesn't really matter to me what the general market does. The majority of my portfolio is invested in either high yield bonds that I bought during the credit crisis or cheap, dividend-paying stocks many of which have specific catalysts that will help their stock prices in the future. I have no problem holding onto these investments for several years.
Even though I'm not all that concerned about the gyrations of the major indices, they are interesting to talk about and follow.