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If History Repeats Itself...

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September 27, 2010 – Comments (2) | RELATED TICKERS: SPY , QQQ , DIA

...a major rally is about to kick off!

It is a matter of the planets aligning:
1) We are about to move into the third year of the "Presidential Cycle"
2) We have a Democrat as President
3) Republicans are about to win Congress

For the Presidential Cycle thing, just Google it. Stock market returns in the first year of a President being in office are on average 5%. The second year averages 3.7%, and the fourth year 9%. Big gains are historically made in the third year (12.6% on average). Some research documents this fact as far back as the 1890's. Read for instance this article. The "third year means market goes up" held true in 25 of the 29 4-year cycles in scope. The average return is particularly impressive with a Democrat in the White House (21%).

Can there still be any doubt that the Republicans will win Congress? I don't think so, in particular about the House. If you disagree, I strongly suggest putting your money where your mouth is: Intrade now rates the odds 74%. The result will be a Democrat in the White House and the Republicans controlling Congress. Historically, that combination has been the best for the stock market, returning on average 9.6% (beating the all-Democrat Government [7%], the Republican WH combined with Democrat-held Congress [4.6%], and the all-Republican Government [1.6%]).

Of course, there are a few caveats here. No doubt some of the regular CAPS posters will argue that this time is different. Maybe they are right. A few skeptics might say that this research is fatally flawed, manipulated, or coincidence at best. Most importantly, Hoover's disastrous Presidency also had a  disastrous third year: the market was down 53% in 1931. However, I like the odds: I am 99% long stocks as of last week.

PS.   Other research shows that the lows of the market typically occur somewhere in the second year, that the peak typically is in the third year (on average in Week 36), and that the average trough-to-peak return (based on 1934-2007) is 49%. The starting point of the rally is often around the start of the fourth quarter. That is exactly why I am fully invested in stocks now. It is also why I am writing this blog today and not near the end of the year.

2 Comments – Post Your Own

#1) On September 27, 2010 at 12:57 PM, lemoneater (56.87) wrote:

Nice non-spam blog. Have a good week!

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#2) On September 27, 2010 at 1:22 PM, leohaas (30.09) wrote:

Thanks, lemoneater. Same to you!

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