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There are definitely plenty of reasons to be concerned about the U.S. economy — and the broad market — in the year ahead.
But as I prepare my strategy for the coming year, there’s an area that clearly argues for being bullish on stocks in 2011 … and it’s probably not one you’d expect …
I’m talking about the political climate in Washington!
As I told my Income Superstars subscribers last month …
The Presidential Cycles Argue for Strong
Gains from U.S. Shares in 2011!
I’ve written about the so-called “Presidential Cycles” before, which I follow closely.
But just as a refresher: I keep a spreadsheet of S&P 500 market data that goes all the way back to 1928, and it’s organized in a way that allows me to see how various political climates affected market returns over most of the 20th Century.
So what does this data say about the stock market under different presidencies?
In short, next year should prove to be a very good one!
The third year of a president’s term is typically the strongest — producing an average annual gain of 14.12 percent for the S&P 500. And under Democratic leadership, that number moves even higher to an average gain of 17.7 percent!
Take a look …
Why is the third year so magical? Probably because investors have had a chance to thoroughly digest the new administration’s policies. Moreover, many of those policy changes have had plenty of time to get implemented.
In contrast, the first year of a president’s term — which is full of uncertainty — is usually the worst, producing an average gain of just 3.1 percent!
Other studies support this notion, especially when the focus narrows to a first-term president’s third year. Since 1945, the Dow Jones Industrial Average has gained an average of 19 percent in such cases compared with just 7.9 percent for all years over that period. The data also points to better overall gains for the third year of a first-term president than for the second-term president.
Of course, mid-term elections have also ended by the beginning of the third year, removing yet another cloud of uncertainty. Which brings me to November’s results, and how they might play into things …
While Gridlock Typically Tempers Stock Market Gains,
It Also Argues for Lower Interest Rates …
There have been five times in the past eight decades when a president controlled both houses of Congress and then lost at least one of them. However, it’s hard to discern a real trend since the stock market’s historical reaction ranged from massive gains to big losses.
What I can say with more certainty is that a divided Congress has not been mildly positive for stocks at best.
I say that because the S&P 500 has risen an average of 4 percent under Congressional gridlock … twice that much when the divide was only between Congress and the White House … and nearly three times as fast when one party ruled the whole roost!
Meanwhile, based on data from the last 50 years, 10-year Treasury prices have typically risen more when Republicans have controlled at least one house of Congress.
In other words, all other things being equal, we should expect interest rates to drop further in the coming year.
Obviously, this cycle has been anything but normal, and anything can happen next. But at the very least, history gives us one reason to remain positive on dividend stocks in 2011.
Best wishes,
Nilus
{ 18 comments }
But, how many of those third terms have occurred during an economic climate like this one? The stock prices on Wall Street, don’t seem justified with what’s happening on Main Street.
Nilus,
I read your column about how you became a successful dividend Investor and was hoping you can choose some good dividend stocks that will do well for me. What do you think about McDonalds?
Verizon?
Thanks,
Lorenz
Yes, but what if the president is an avowed communist and attained the office under an assumed name?
Re John Jauregui posting. The avowed communist you speak of, would that be the US gov’t debt’s major holder, The Chinese, who make individual families pay for the public education of their children, amoungst their other non-socialistic methods of governance?
The assumed name of our current president, would that be Liberal Agent of Change, as opposed to the Moderate Agent of Compromise who currently occupies the White House.
Weiss & Co. you need a moderator on this site, to remove degoratory, unwarranted, and downright ridiculous postings such as this one, that pollute and weaken the discourse, which is supposed to have a serious tone about serious matters of finance and personal investing.
From where I live in Australia comments like the one by Jauregui make Americans look loopy. How would he feel if his patriotism was questioned because he has an ethnic sounding name?
Martin N – i agree.
Also D. Weiss with his cycle research theory guys say that a bear market should begin around 2011 March – But then they have guys that are bullish on this site. don’t get this site anymore –
You guys are so good at what you do – Scary to take up a subscription as there is to many contraction in the newsletters at the moment.
It’s seem like the cycle theory guys are on the money – they called a dollar rally after Election bang on but now Nilus is bullish on stocks – Clarity PLEASE Mr. Weiss –
No just big story stuff – clarity on cycle theory – Please D. Weiss write a newsletter about the contradiction you have on this site.
How can you have any market going higher in the world if there is bear market in the USA beginning next year march, april, may that last till end of 2012.
Is there a de coupling thing going to happen -
Very funny. I think you have to be 50/50 here, confident in the short term, but also careful in the long view, at least for awhile longer.
Some one should tell John A. Jauregui that Communism is dead..It no longer exists in China or any where else of importance. North Korea and Cuba may linger in a coma for a bit longer but there is no longer a viable communist government.
Someone should also tell Mr. Jaeregui that rediculous name calling is something that ended in Kindergarten and has no place in a serious economic or political discussion
I think the risk this year will be if inflation gets out of hand.That would force interest rates up,no matter what Bernanke wants.We’ve seen massive increases in most commodities in 2010.Unless those commodity prices decline there will be much higher retail inflation in 2011.Most other countries have been raising their interest rates for several months.Higher rates in the U.S. are likely.
“Interest rate drop” with inflation climbing, uh please.
Dear who knows the answer. 450 banks which may go broke this year; what are they?
I take ALL predictions based on past occurrences with the proverbial grain of salt.
Situations rarely (tempted to say never) precisely repeat themselves, there are simply far to many variables! In my view it is dangerous to establish a mindset based on past history that would lead to an expectation of specific things happening as opposed to being ALERT to all the nuances and possibilities that the market presents.
Sure would like Nilus to explain HOW interest rates can fall further when they are already virtually at zero?
On the other hand as promoted by some, interest rates are set to rise substantially and that would lead to a breakdown of the fractional reserve banking system as governments at all levels as well as over leveraged individuals would no longer be able to service their debt.
All,
I am not a member of the Weiss staff, but I believe I can explain the apparent very clear contradiction between the Weiss cycle folks such as Dr Mogey and his predictions, and Nilus’s very bullish view on Stocks for 2011 given the 3rd year of a Presidential cycle. It turns out that both can be correct if one is willing to parse 2011 into two distinct segments. The Weiss cycle folks predict that there will be the start of a major downturn in the Global Stock Markets in 2011 with the worst coming in 2012 as two business cycles bottom and the Global Economy slows. The Weiss cycle folks have offered an educated guess for March 2011 as the start, but they will tell you their predicted down turn can start anytime in 2011 including late in the year. Nilus Bullish analysis picks up on that of Geremy Grantham and many others. However, he did not indicate that the 3rd Presidential year goes from October of year two to the end of September year 3 with the fourth year starting in October. This is how they avoid the October 1987 wipeout, and it is also why Grantham and Grove (Pimco) among others believe that sometime between October 2011 and early 2012 we will see the slaughter of the Global Equity Markets akin to 1987, 1931 or worse. Therefore, Nilus may be dead on for the first 9 months of 2011 as we reach the October 2007 highs (best case) with a Stock Market massacre starting sometime in the following 4-6 months just like in 2008.
Also, in 2012 according to the Weiss cycle folks the World enters a 5 year “initial war window” period with 2015/2016 being likely dates for some serious but not all out conflict, with 2020-2025 the real danger period for a full scale Global War. This in turn could end the predicted trend of Global wealth flowing West to East between now and 2020 when Dr Mogey and other cycle folks like Strauss and Howe “The Fourth Turning” (1997) believe a Global Crisis and Global War may begin as the current 1914-2020? Historical Era comes to an end.
This all sounds so like Ken Fisher, Fisher Investments, who lost billions for his clients in 2008,09 by telling everyone about the Presidential election cycles — that was a load of hooey. Sort of like: the last year of a Presidential cycle is when the markets go up, up, up, up, up — and as we know they went down, down, down, down. I am also turned off by the contrary opinions on the Weiss sites. Last year he was saying that we should get out of this, that or the other because markets were going to tank. Then a few months later, we received an email saying: get into the markets they are going up. I don’t listen to any of these pundits anymore, and I have cancelled all my investment/financial subscriptions for that reason.
Eileen,
I’m glad to see other posts negative of Weiss like yours have posted here. You are right about Weiss giving bad advice to clients in 2009 and in 2010. For example, his Million Dollar Contrarian Fund performance is unknown but definitely negative. How many people lost money there? I remember so many of them asking on Weiss’ blog if the DOW was really going back t0 6500 or even 5K like he had warned.
All in all, Weiss is a pessimist who will always see the glass half empty until he can buy US Steel for $1 a share.
gentlemen;the underlying debt is still there and will be delt with one way or another but the depreciated dollar over several years indicates stocks are cheap as per the PM markets kept up with the ever dropping dollar bear in mind the stocks are cheap against the depreciated dollar over years but the real value relative to growth is negative.so besure to buy only the very best just to stay even.
beware and get into the very best only and stay in PM
Well I have acted contra to the Weiss advice over the last 18 months and have realized some solid gains. Over the last few years Weiss have advised a lot like the bellhop who tells you to buy shares at the top and sell them at the bottom.