[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?

[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.

[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.

[powayseller]

Shifts in buyer behavior show up in the changes in demand and supply. Thus, the 3 indictors that I mentioned. Realtors will be the first to see the shift in buyer behavior. They are one of the indicators I mentioned. As demand picks up, months inventory will peak and decline.

It is disappointing that none of the real estate experts, Real Estate Centers, or economists have provided real estate cycle forecasting tools. So I have provided a forecasting tool myself, and in the absence of any others out there, is what will have to do. Time will tell if it works.

[powayseller]

Time for me to get my money out of World Savings…They’ve been offering the highest rates for a while. Back in March, their rates were higher than anything I could find on bankrate.com. They own GoldenWest, CA’s biggest subprime lender. I assume they portfolio their loans. I plan to buy Treasury bills in September, when my CD is up. (Or buy into that stock rally that might set up in the fall?)

[powayseller]

The realtors I met on piggington are very smart; several are engineers. Bob Casagrand is a retired business executive, who turned around divisions of major US corporations in Europe and the US, and consulted in Saudi Arabia. I have 2 realtor friends, ladies, who are also intelligent. But I am sure there are many below average folks too, since the barrier of entry is low and the perception of easy money exists. I just have not met these people personally.

[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).

[powayseller]

You could do a write-up without the data files. I don’t know how to put Excel files here.

[powayseller]

Interesting point. I remember Thornberg talked about rising benefit costs of employers were taking away from wage increases. I had not considered that wages were also reduced on the employee’s side by higher insurance co-pays. As far as cost of living, that is reflected by using *real* per capita income. I believe per capita income is adjusted by inflation. Of course, I would argue that inflation is actually much higher than the offical CPI, so wages are indeed falling even if the *real* number is the same.

[powayseller]

My husband says he has found the best bike trails in Poway’s preserves. I think there should be some books on trails in San Diego County.

[powayseller]

KingKong, what is the pricing and inventory now, compared to earlier this year?

[powayseller]

Very interesting…I would love to see some of our data. How long have you been gathering it, and what are your conclusions? What role will the internet have, via our access to more information, in helping us follow price movements in real estate?

[powayseller]

Please explain.

[powayseller]

carlislematthew – I don’t know why the median is reported year over year, and GDP is reported quarter over quarter, many government data is reported monthly. Oil prices are reported daily or hourly. The median peaked in November, but people not following real estate, had no idea.

SD Realtor – why doesn’t the NAR report months inventory, pending sales (because they reflect currect conditions) instead of the median which reflects offers made many months before? It seems that reporting monthly median changes would be helpful to the NAR mission of promoting RE buying, as prices are rising. Why didn’t they adopt that method during this last cycle? What kind of rapport do most realtors have with the NAR or CAR? Last question – what are you waiting for to buy a house again? BTW – you are one of my favorite realtors: ethical, honest, hard working, very nice, smart, funny. You’ve figured out this market, and you are here to teach us about it. You’re really great!

[powayseller]

This is a very important topic, and I owe my knowledge of this to realtor Bob Casagrand. I started a new thread about the median.

Other tips:
Bob tells me that as a buyer’s agent, he tells his buyers to pick 3 homes. Don’t get emotionally attached to one home, because if you do, you lose your purchasing power. Make a 24-hour offer on property #1. (My addition: write in the offer letter this is a firm and final offer, and that you have 2-3 other homes on which you are ready to make an offer; this puts pressure on the seller to take your offer and not mess around with countering; if they do counter, have your agent remind them that you mean it: firm and final or you walk. This sort of happened to me in my sale, and boy does it work!!) If the sellers counter, you go on to property #2. Only give them 24 hours; put more pressure on them.

I am sure the realtors on this blog can give you more tips.

Let us know how the offers turn out. My only other tip is to wait. I think the big price drops will start in 2008, as the majority of ARM holders are headed into foreclosure, inventory jumps, buyers keep decreasing as fear sets in, bank REOs make the news, and sellers who need to sell have to fight hard for the few buyers out there.

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