The debate in the market these days centers primarily on the questions of (a) if the Fed will set sail on the QE II on November 3rd, (b) how much the FOMC is willing to spend in order to knock interest rates down farther, and (c) if such a plan will even work. Oh, and for those politically inclined, there is the small matter of the mid-term elections coming up on Tuesday, November 2nd.
It seems there is no shortage of opinions on whether or not QE II is necessary or how much cash will be required to put a little inflation back into the mix. Perhaps part of the problem is that the direct purchase of treasury bonds, a.k.a. quantitative easing, is really an unproven tool. However, for the past month or so, traders have taken the stance that the QE II program is going to put the U.S. economy on a stronger growth path.
The rally in stocks since September 1st has been impressive to say the least. The DJIA is just a whisker away from the high water mark for this bull market and the S&P 500 has gained nearly 13% since the end of August. Yet the bears are of the mind that the market has gotten ahead of itself and is overdue for a corrective phase. After all, they say, trees don’t grow to the sky – even if they are getting a little help from one Ben Bernanke.
Those in the glass-is-half-empty crowd also contend that hope can only take a market so far, and as such, stock investors may be set up for disappointment when QE II doesn’t start working instantaneously.
However, the players on both teams may be missing the point. Those that follow the historical patterns in the market suggest that we should forget about QE II, earnings, interest rates, and the dollar, because, in short, history is on the bulls’ side for the next nine months or so.
Although Merrill Lynch is known for being bullish on America in general; an analyst at “Mother Merrill” says this is the time to be especially optimistic about the potential for stock prices.
Joe Zidel, an investment strategist at Bank of America Merrill Lynch told CNBC, “Right now there’s fear about the U.S. economy, regulation, and taxes and those are legitimate concerns, but as we look at the market our view is that it’s actually a good time to be buying equities.”
Most experienced investors know that the best time of year to invest in stocks is from November (actually, the low of October is the best starting point) through the end of April. According to Stock Trader’s Almanac, between November and April, the Dow Jones Industrials have returned 7.4% on average during the six-month period since 1950. What about the May through October period, you ask? Well, the venerable DJIA has seen average gains of just 0.4%.
In essence then, 94.8% of all stock market gains since 1950 have come during the November through April period. So, in looking at the calendar…
This is hardly ground breaking analysis as this historical pattern is very well worn. However, what investors may not know is that this trend is especially powerful during midterm election years.
An analysis of something called the Presidential Election Pattern as well as the Four-Year Presidential Cycle shows that since 1900, the Dow has tended to soar from October 1st of the second year of a President’s four-year term until the middle of the third quarter of the following year.
In addition, history shows that stocks have done quite well with a Democrat in the White House and a Congress controlled by Republicans. While the sample size is relatively small (most investors may be surprised to learn that a Republican-controlled Congress is actually a rarity), over the past 70 years, such a combination in Washington has led to average annual returns of slightly more than 15% per year.
So, let’s take a step back from the QE II hysteria and take a look at where we are from a big-picture cyclical standpoint. First, November 1st is right around the corner and as such, the best six-month period of the year is about to begin. Second, we are in the sweet spot of the Presidential Cycle. And third, it is likely that we will have the favored political combination of a Democratic President and at least a Republican-controlled House.
While all of this big-picture stuff may not mean much on a day-to-day basis and stocks may indeed find a reason to correct lower in the near-term, we thought you might like to know that the historical background environment is about as good as it can get. And thus, THIS may be the reason that the mutual funds seem to be in there buying each and every dip in stock prices.
S&P 500 Last 5 Years
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