Stock Market Rallies in Mid-Term Election Years

[powayseller]

Has anyone studied the factors in place to allow stock markets to rally, in the face of a weakening economy heading into recession? Historically, stocks rally in mid-term election years. A long rally of one year or two years. I guess this happened also in the recession years 1982 and 1990. What I don’t know, after googling this for many hours, is any more about it. Very little info exist on this topic. Perhaps in 1982 and 1990, the economy was on the road of recovery OUT of a recession, not going INTO one.

There’s another historical precedent: after the Fed stops raising interest rates, the stock market falls for several months.

If Roubini is right, and the Fed cuts rates at its September meeting, thus fulfilling the mid-term election year political promise, could the stock market rally for one year? In spite of weak earnings and lower GDP and rising oil prices?

Any insight is appreciated.

[Daniel]

Powayseller asked…

“If Roubini is right, and the Fed cuts rates at its September meeting, thus fulfilling the mid-term election year political promise, could the stock market rally for one year? In spite of weak earnings and lower GDP and rising oil prices?”

Sure it could. Or it could not. Perhaps there is a chance to time the RE market, but I’d say there is absolutely no chance to time the stock market. At least, I know I can’t do it (perhaps smarter traders can), so I’m not even trying.

By the way, one of my favorite blogs, http://www.crossingwallstreet.com, just had a piece on the stock market and election cycle. It’s interesting reading, but I’d suggest not to draw too many practical conclusions out of it.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

This is one of the most widely known cycles in the stock market. I am not sure how anyone could look at something like this that has outperformed the market as a whole by this magnitude, and conclude that.

There are many people, myself included, that have track records of beating the market. These types of tools are what you use to do it. The reason why they do continue to work, and always will, is that the average person thinks their arbitrary opinion of the economic conditions at hand supercede cycles. What if your opinions are wrong? What if we do not have a big recession, and a big RE selloff?

As a result, they will kick this info aside and “wait until it is safe” to go in. March 2000 was the last “safe” time. The “safe” point they choose is typically where people like me are exiting (selling).If everyone acted properly in accordance with cycles like this, they would probably diminish in their effectiveness.

Timing RE is much harder due to having much less historical data, and also that nature of the asset and it’s lack of liquidity. I do sense in here in general, a very obstinate nature in opinions. It is one thing to have strong opinions as most of us do, but what about considering the other side occasionally. I am constantly forced to do this due to the nature of my business. I have to maintain the flexibility in my thinking to admit to a trade being no good, and getting out of it. Often at times that can mean, completely reversing my position based on the facts at hand.

I share the same view many of you do about the fate of RE in the next few years. However, I will venture to bet that most of you will be afraid to buy when the bottom falls out for fear of it going further. I would argue, that will be the exact time you should buy. Waiting for it to be “safe” is not a way to get ahead of the herd.

In conclusion, what about just for the moment considering that the second most powerful stock market cycle that has provided a great timing edge for over 50 years, might actually have some value? Economists make money selling you opinions, not investment advice. Most of them cannot trade their way out of a paper bag, and wouldn’t even try to. And to top this off, in the spirit of being flexible, I could be wrong! I am willing to take the loss if I am wrong and move on to the next high probability situation. There are no guarantees in life the last time I checked.

[powayseller]

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).

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

The simplest way to explain the earnings relationship is as follows. The market is anywhere from 6 months to a year ahead of the earnings. A rally now indicates future increased earnings, not current. A decline now indicates future decreased earnings not current. Earnings are not currently declining. Even the RE firms have increasing 12 month earnings right at this moment, just plot the numbers.

[powayseller]

Homebuilder earnings are declining though. Consumer spending is slowing, and the slowing housing market and higher oil prices are weighing on the market, aren’t they? I have not followed the stock market much the last few years. Could you explain then why you are in cash now – aren’t you expecting a stock market decline, and then you want to get in at the bottom in time for the rally?

Here’s an interesting chart, Long-Term Interest Rates going back to 1960. It is in response to someone who said we are at a permanently higher plateau with stock prices. When we were in a period of rising interest rates from 1960 – 1982, the S&P500 gained only 2.9% annually, while from 1982 – 2003, a time of falling interest rates, it gained 10.5%. It’s never really different.

The other charts on that link above are very interesting – they show that slowing consumer spending presages bear markets, and corporate profits actually recover during a recession, while unemployment hits its highest level and people are afraid to be in stocks. It is precisely at that time, when the indicators appear so bad, that is the best time to be back in the market, getting ready for the next rally. So what retail analyst Elliott found in his research lines up with what Chris does in his trading. They are looking at the stock market from different angles, but finding the same thing.

[anxvariety]

I share the same view many of you do about the fate of RE in the next few years. However, I will venture to bet that most of you will be afraid to buy when the bottom falls out for fear of it going further.

Oh.

[powayseller]

Here’s another factor of support for a stock market rally: wages are rising. I am using Elliott’s model for predicting bear and bull markets based on the leading indicator: changes in the RATE OF CHANGE in PCE, which is led by WAGES. With wages starting to go up, consumer spending ought to get a nice bounce.

Now the only question is, how much will the housing slowdown and high oil prices affect the consumer pocketbook and work against the #1 predictor of earnings per share (which is real wages).

Does anyone have any data for stock markets rallying in the face of declining earnings? I am certainly interested in a possible rally this fall, as I want to up my 5.5% return. Historically, there has been huge rallies buying into the mid-term presidential election years. Buying at that time and holding for 1 year gets 20-50% returns.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

All of the reasons why I went to cash in stocks are the reasons I explained in my newsletter the last 3 months. The seasonals, the commercials, and the bond market divergence. My plan all along was to exit in April/May and gear up for the fall rally. Seasonals do not always work right on the dime, but they do provide a good general framework to look for opportunities. The market has not yet fallen as far as I thought it would by now, so maybe it will not. I will just wait until the fall, and see if this trade is set up properly. If today were Nov 1st, it would not be a go due to the commercials not being heavily long at this point.

I have no idea if there is any correlation between consumer spending and stock rallies and declines. I have never studied that. It is tough to use government reports for study due to all of the revisions that occur over time with them.

[anxvariety]

Hi, I’m a post.

[powayseller]

What I was wondering is how often stock market rallies occur in times of falling earnings. As corporate profits continue falling over the next 6 months, I was expecting the stock market to fall too. With the 4-year cycle scenario, the stock market would rally in the face of falling profits. So I’m wondering how often this happens (a stock market rally in the presence of falling corporate earnings), and if you have any time periods for this.

I guess a Fed easing could spark a rally, but how long-lived could that be, considering rising inflation and falling earnings?

I expect corporate earnings to be low for at least a year, and a stock market bottom in early Q1 07, when the recession starts. My plan is to get back into stocks when they are really beat up, early to mid next year.

This whole thing is very interesting. If the market doesn’t rally this fall, would this be the first exception in the history of the market?

[SD Realtor]

Chris –

Do you have a website? Do you charge for your newsletter? How would I be able to sign up for it?

[SD Realtor]

Chris –

Do you have a website? Do you charge for your newsletter? How would I be able to sign up for it?

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

SD my web site address is http://www.iamafuturestrader.com and I also have a blog that has a link to it from the bottom of the first page of my site. The link is in the midst of the last paragraph of text. The direct link is http://iamafuturestrader.blogspot.com/.

I cover something related to these types of things each day. Often I discuss commodities in the blog since so many people are interested in that nowadays.

The newsletter is a pay service that is $250/yr. If you send me an email to [email protected] I could send you a copy of one of the newsletters so that you could get a feel for what it typically covers. It may or may not be for you, depending on your interests. I do cover what I expect in the stock market upcoming in every edition, that is one of the basic staples of it. Typically I will also cover other markets that are either in the news like GOLD or Oil, or one that is set up for an upcoming trade.

[powayseller]

I love Chris’ newsletters! In one of them, he showed his research, via charts, of why gold does not follow the dollar, but inflation. It was driving me nuts when the median would keep writing “gold is up today because the dollar is weaker”, when that was just a coincidence. The media people have no clue why things happen, but they feel like they must give a reason for why they do happen. They’re just making stuff up. But Chris’ stuff is based on research and his experience trading for 20 some years.

Chris, are you still looking into that question: examples of where the stock market rallied when earnings per share were decreasing.

[Author]

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