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Printer Friendly View (with text zoom)BEING STREET SMART by Sy Harding LOOKING AHEAD TO 2010! December 31, 2009. In last week’s column I discussed academic studies that
confirm the remarkable consistency of the market’s annual seasonal pattern, how
with few exceptions markets in the majority of countries tend to make most of
their gains in the winter months, and experience most of their serious
corrections and bear market declines between May and November. I cautioned that because 2009 was one of the rare years when
those seasonal patterns did not appear, investors should not be lulled into a
false sense of security, that they may be surprised how aggressively the
seasonal pattern bounces back in 2010. There is another historical pattern that also has to be
considered for next year. I remind you of it every four years. It’s the
Four-Year Presidential Cycle. The history of the Presidential Cycle is that the economy and
stock market tend to have problems in the first two years of each new
president’s term, and then recover and be robust over the last two years of the
term. Studies show the reason for that pattern is that each new
Administration realizes the economy and stock market must be strong when the
next election time rolls around if they are to be re-elected. So they pull out
all the stops to stimulate the economy to make sure that happens. However, all
that excessive priming of the pump usually has the economy overheated, and the
stock market overbought and overpriced, by the time the next election takes
place. Those excesses then need to be corrected, the corrections
taking place in the first two years of the next term. Then stimulus efforts
begin again to make sure the economy and stock market are strong again for the
following election. The cycle has a very consistent pattern. For instance, almost
all bear markets have taken place in the first two years of the presidential
cycle, and almost all recoveries have been underway in the last two years of the
cycle. The pattern is not consistent when a president is in his
second term, perhaps because he cannot be re-elected. For instance, the pattern
was clearly evident in Reagan’s, Clinton’s, and Bush Jr’s first terms. But
normal corrections were not allowed to take place in the first two years of
their second terms, the economy and market just kept on going. That allowed the
excesses to become more serious. So the 1987 crash took place in the third year
of Reagan’s second term, the 2000-2002 bear market began in the fourth year of
Clinton’s second term, and the recent 2007-2009 bear market began in the fourth
year of Bush’s second term. However, although the problems started a year earlier for the
next president in those instances, in the final year of the previous
administration, the corrections (a crash and two severe bear markets) were so
severe that it still took until the 3rd year of the next president’s
term to see recovery clearly underway. So what does that mean for next year, when we have a
president in his first term, and next year will be the second year in this
presidential cycle? There will still be economic problems, in the real estate
sector when the program of big tax rebates to home buyers expires in the spring,
in the financial sector as commercial loan defaults continue to spike, in
consumer spending (75% of the economy) as consumers remain hunkered down under
high debt levels and high unemployment. No one expects any more than tepid
economic growth next year. There may even be a dip back into recession for a
quarter or two. Of the seven recessions since 1957, five had W bottoms rather
than V bottoms. That is, they experienced one or two positive quarters and then
dropped back into recession for one or two quarters. So between annual seasonality patterns probably returning,
and economic problems not having gone completely away, and next year being the 2nd
year of the presidential cycle, we can expect problems sometime during the year
for the stock market. However, there is something else - a big positive. The most consistent market pattern we have ever encountered
is that since at least 1918 there has been a substantial rally from the low in
the second year of every Presidential
term to the high the following year. That is so whether it was a president’s
first or second term. Even the conservative Dow gained an average of 50% in
those rallies. It has taken place no matter which political party was in
office, in periods of war or peace, high or low interest rates, high or low
inflation, high or low budget deficits, or whatever. In fact the market makes most of its long-term gains in the
period from the low in the second year of the presidential cycle through the
following election year. It’s a period when you would not want to be out of the
market, a period when even buy and hold investing is at its best. The problem is in getting safely to that low. Historically,
it has more often taken place in the fall, but over the years every month has
had a turn or two in producing the low, even January. So, it is highly likely there will be an important time next
year to take profits and stand aside, to avoid the large losses that have taken
place within each year recently. But also a time to buy with both hands, to even
use margin and leverage. But it will be tricky to identify those key turning
points. The problem is not made easier by the fact that each of the last two
years experienced serious downturns right out of the gate, beginning just a few
days into January.
For that
reason, although our Seasonal Timing Strategy is in its favorable season and
subscribers are 100% invested, we have a very close protective stop on its
holdings to prevent a loss of any size, while our Market-Timing Strategy
portfolio is still on a buy signal, but now only cautiously invested in
diversified holdings at least until we have the data for the first few days of
the new year.
Sy
Harding is president of Asset Management Research Corp, publishers of the
financial website StreetSmartReport.com; the Street Smart Long and Short Stock
Advisor; and a free daily market blog at
www.StreetSmartPost.com. These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. Back to the Top Home Forward to a Friend >>>
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