History says the market goes up big time next year
by Peter Switzer
The economic scorecard for the US economy isn’t impressive — economic growth is below hopes, unemployment is stuck at 9.6 per cent, the latest employment report disappointed and the US consumer is saving and not spending — but yet the Dow crashed through the 11,000-level!
What gives? How could an ordinary to negative jobs report see Wall Street head up last Friday?
The doubled-barrelled answers are the promise of more money for the US economy from the Federal Reserve — quantitative easing MkII or QE2 — and the history of scheming US presidents. You could also throw in less uncertainty but that doesn’t always have to be the critical issue.
The Friday data
For numbers types, the Dow put on 57.9 points or 0.53 per cent to finish at 11,006.48. It rose 1.62 per cent last week and is now up 5.55 per cent for the year. The Yanks haven’t seen these levels since May when Euro-debt concerns spooked global stock markets.
The S&P 500 is at 1165.13 after rising 0.61 per cent and is up 4.49 per cent for the year.
The VIX or fear index is around 20 and has fallen this week, which is always a good sign for share buyers.
The highest level we have seen on the Dow this year is 11,205, which happened on 26 April.
This positive milestone of Dow 11,000 happened even though private bosses only put on 64,000 jobs in September, which was 11,000 short of expectations. In total, 95,000 jobs were lost and so public sector employers, crazily, are keeping the unemployment rate at a stubborn 9.6 per cent level. I should say, economists thought this would have gone to 9.7 per cent.
In a sense US investors were in a pretty good position. If the jobs report was great, it would have meant that the US economy was better than expected. But if it was a poor report, then it would mean the Fed would bring on QE2.
There are calculations that it will pump $500 billion into the system and this would push up economic growth to around 2.5 per cent to help job creation.
But that is not all. The Yanks will be helped by their political cycle.
In an excellent article in The New York Times, it was shown that the third year of a presidential term is great for stock markets. This coincides with my revelation that 18 out of the past 19 periods after the mid-term elections in the US, the market has gone up by double-digit results over the ensuing six months.
Eric C. Bjorgen, a senior research analyst at the Leuthold Group, confirmed this view and says since 1942, the average return was 18 per cent.
The NY Times article also pointed to Ned Davis Research for the time between 1900 and 2009, where it was found that the first year of a presidential term brought a 5.5 per cent return from the market. Year two was 3.7 per cent followed by 12.6 per cent for the third year. As the US election cycle is four years, obviously this happens after the mid-term elections held in November of the second year.
For those interested, year four brings 7.5 per cent on average. And by the way, money supply analysis by academics shows that it has a tendency to increase in year two of a presidential term, which then leads to better GDP in the following years.
Of course, US central bank bosses are independent but there’s one case pointed to in The NY Times article worth mentioning, which involved disgraced and eventually impeached president, Richard Nixon.
In 1972, he prevailed on the Fed chief Arthur F. Burns to increase the money supply to push up economic growth and to create jobs. He won the next election but was brought undone by Watergate!
Scandal aside, history is a strong pointer to a better year on the stock market next year and given that markets always try to get in ahead of the expected better economic news, this positiveness on stock markets now can be pretty easily understood.
All you have to do now is hope that history does repeat itself. My bet is that it will.
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Published on: Monday, October 11, 2010blog comments powered by Disqus