For me the time it is “safe” to go in, is when everybody is trying to get out, when prices are at the bottom. With real estate and stocks, I am looking for a bottom.
Although company earnings will increase only after consumer spending picks up again, it seems stock markets can rally in the face of declining earnings. That’s how we end up with overvalued stock markets.
I did a little research today on the mid-election year cycles, and there truly is a historic precedent. This does not mean that company earnings are going up in Year 3 of the election cycle, but stock prices go up anyway. This counterintuitive fact threw me for a loop. I thought the stock market would rally only when earnings go up. But I guess not – it can rally when earnings are flat or declining. Perhaps Chris has more info on how often the stock market rallies in the face of declining earnings.
I expect the Fed to start cutting interest rates in September, and again in November. This could set the economic stage for a good rally. Nonetheless, history going back 60 years or so shows this is the best time for stocks – the fall of a mid-election year. You hold for one year, so it’s a long term trade. Thanks again to Chris for pointing this out. I am anxious to follow this.
There is historical precedent for the markets to rally in mid-term presidential election years. Furthermore, “according to the Stock Trader’s Almanac, all the net gains in the Dow Jones industrials since 1950 have occurred from November through April. On average, since 1914, the Dow has jumped a whopping 50 percent from the bottom it hits in the second year to the top in the third year, the Almanac says. This bounce ties in with statistics that show the second and third years of the four-year cycle tend to be the best for stock markets as the party in power gears up for the following year’s election, and tries to keep investors happy. Barring unpredictable developments in Iraq or global oil supply, the analysts said, the market could see a similar move, down and then back up, later in 2006 and 2007. Money.cnn.com
WiseAdvisor:
“Fortunately, one of the most reliable and easily understood cycles is the 4 year election cycle. This is well documented going back several decades and it is dominated by the need to produce a strong economy a few months prior to the Presidential election. What this means is that starting 2 years prior to an election, policy needs to turn highly expansionary as there is about a one year lag before this policy feeds through to the economy. In other words 2007 needs to be a year of significant stimulus to ensure the economy feels good in 2008 well ahead of the election at the end of that year.
Hussman Funds
The 12-month period beginning in October of the second year of the presidential term has enjoyed average total returns of more than 28 percent, on average. And since 1933, not a single third year 12-month period beginning in October has registered a loss (the worst return was a gain of 6.6 percent).
