I may not have harped on the subject lately or you might have become a more recent reader of this column, but today—short and sweet—I am explaining why investors should be surprisingly hopeful and positive about the stock market in the next 12 -14 months.
Long time readers can recite with me: history repeats itself and the stock market performs consistently over four year presidential term cycles. It matters little which party holds the oval office. Since World War II, only once, in 2015, did the Dow Jones Industrial Average suffer a loss during the year prior to the presidential election year. Under President Obama in his second term, the Dow lost 2.2 percent. This comes from a statistical treasure trove known as The Stock Trader’s Almanac.
If one reviews the cycles back to President Jackson in 1833 and averages every one, the third full calendar year has produced an average 10.2 percent gain. And the next best year is the fourth year or 2020 in which we will next regularly schedule a chief executive vote. That average comes in at 6 percent positive.
Does it matter what else is going on in the world? Apparently not since positive results marked even years during which we were fighting in Viet Nam, replacing President Nixon, fighting the Cold War, the Iraqi War, or suffering the effects of Zero Interest Rate Policy.
There are suggested reasons for this phenomenon, mainly having to do with extra (federal spending) gas often poured on the national economic fire. But I have not the foggiest notion why it should be such a strong trend.
What I do know is that it follows the mid-term election year. The second year, 2018 for example is usually the worst or second worst year of the cycle. Is that because we vilify everyone so vehemently who may not agree with us? I don’t know that true causation either.
Most financial experts still promote the efficient markets hypothesis. That proposition holds that at any given time, each stock’s price makes sense because it is in equilibrium between those willing to buy and to sell.
The Finke Market Hypothesis holds that stock prices make sense for about 15 minutes as they rise and 15 minutes as they plummet. Was the stock market priced correctly on September 20th when a new high of 2,939 was reach? Or was it rationally valued a few weeks later when it touched down to 2,598, almost 12 percent lower? One of our favorite market watchers said that the latter value was pricing in a full-blown recession in the very short run. Sounds pretty unlikely to me.
After a Monday of wonderful gains, the bottom dropped out yet again. Again, I do not know why. The important factor to remember is that this element of volatility is absolutely essential for anyone to be able to make a greater return than found in a perfect Certificate of Deposit guaranteed by your local bank and the FDIC.
But when a statistic holds true decade after decade, I believe it is more likely than not, that this trend will continue. More importantly, you and I can make money using it. The economic fundamentals are still getting better and better. If I were a betting man, which I am not, I would bet you will be surprised at how well Mr. Market behaves in the next year.