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Mark Hulbert
April 2, 2010, 12:01 a.m. EDT · Recommend · Post:
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By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- According to the Presidential Election Year Cycle, this year is not supposed to be a particularly good one for the stock market.
But some devotees of this cycle are nevertheless bullish -- and thereby hangs a tale.
The Presidential Election Year Cycle, of course, is based on the powerful incentives that presidents have to get the economy to look its best at the time of the next election, either to support their own reelection or the election of someone from their party.
The implication of this theory is that, immediately after assuming office, presidents swallow whatever economic medicine is necessary, in order to set the stage for the recovery and economic good times that, come the next election, will convince voters with only short-term memories that happy days are here to stay.
The historical data certainly appear to provide strong support for this theory: The stock market does indeed perform better in the second half of presidents' terms than the first half. The stock market on average hits its lowest point of the entire four-year term near the end of the second year.
This pattern is based on an average of many years, of course, and there can be wide year-by-year deviation from that pattern. Last year, for example, was not supposed to be an especially good one for the stock market, according to the theory. And, yet, the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,927, +70.44, +0.65%) produced a return in 2009 that was about double the benchmark's long-term average.
Still, the implication of the theory is that this year will be one in which the stock market is facing more than the usual amount of headwinds. How can you draw bullish conclusions from that?
By looking beyond the valley to the hills that lie beyond, that's how.
Consider the April issue of Bob Brinker's Marketimer, which was published earlier this week. In that issue, Brinker reports that "in every case during the past half-century, a very significant stock market rally has followed the completion of each mid-term election year bottom."
How significant?
According to Brinker's calculations, those rallies have on average lasted through the end of the presidential term and produced gains for the Dow in excess of 100%.
To be sure, Brinker is not forecasting gains of that magnitude this time around. He reports that, during secular bear markets, such as what he believes we're in now, the market has produced average gains of only around 50% from the low set in the second years of presidents' terms. And his target level for the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,178, +8.67, +0.74%) is just the mid-to-upper 1200s, which represents an increase over current levels in just the high single digits.
Still, he is recommending that his clients maintain a fully invested allocation in their equity portfolios.
Brinker deserves to be listened to because his long-term record his good. Even though he failed to anticipate the recent bear market, his market timing record over the long-term remains one of the best of any tracked by the Hulbert Financial Digest.
However, as you consider his arguments, don't forget that other followers of the Presidential Election Year Cycle are not as bullish for the next several years. Consider Jeremy Grantham, the chief investment strategist at GMO, who is one of the most vocal supporters of this cycle. He believes that the government's stimulus program last year in effect turned 2009 into the functional equivalent of the third year of a president's term.
According to Grantham's argument, therefore, the stock market's prospects for 2010 depend on how much longer and further the government can and will extend its stimulus. And that certainly seems a far less-than-solid foundation on which to base a bullish forecast.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of investment advisory newsletters. The HFD became a service of MarketWatch in April 2002. In addition to his regular columns for MarketWatch, Hulbert writes a column on investment strategies for the Sunday New York Times, a monthly column for Barron's.com and a column on newsletters for the Journal of the American Association of Individual Investors. Dow Jones and MarketWatch are launching a weekly newsletter, Hulbert on Markets: What's Working This Week.
It's spring. And, like the swallows' trek to San Juan Capistrano, speculators appear to be flocking back into the energy market.
3:58 p.m. April 1, 2010 | Comments: 58
- halvewitcantype | 11:21 p.m. April 1, 2010
"No sunshine in this solar energy ETF http://on.mktw.net/dvtP4y" 11:22 p.m. EDT, April 1, 2010 from MKTWJaffe
"Gimme indie or gimme death. Fight the Repub/Democ regime thats nationalized industries & created corporate and individual welfare programs!" 8:50 p.m. EDT, April 1, 2010 from codywillard
"Ever feel like u left it all out on the field like you did when you playin 8th grade football on Thur of a wk of 2adays? I'm done. til tmrw." 8:43 p.m. EDT, April 1, 2010 from codywillard
"You have some control over your health-care costs: There's a lot of news right now about health reform and wh... http://on.mktw.net/aDZwa8" 4:56 p.m. EDT, April 1, 2010 from MKTWCoombes
"Four tips for saving money on health care http://on.mktw.net/9hC23a" 4:21 p.m. EDT, April 1, 2010 from MktwGerencher
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