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Now history points to shares
by Peter Switzer
The Gillard Government’s banking reforms are important as they will increase competition to a moderate degree, but they should hurt bank shares prices a bit as well. However, the negative share-price impact could be lost in what could be a great share market next year, if we can rely on history.
Look to history
Last week I broke the news about Goldman Sachs tipping a 20 per cent rise in the stock market in 2011 and over the weekend The New York Times’ Floyd Norris put together a good historical case for a strong stock market next year.
Many of his arguments have been canvassed by me over the past six months or so, and regular readers could have feelings of déjà vu, but it was nice to see Norris wrap up my reasons for being long shares in a nice little statistical package.
He argues the omens are lining up, suggesting it will be a positive year for Wall Street and Main Street next year, though the latter could even have greater joy in 2012.
The third year
History shows the third year of a presidential cycle — that’s 2011 — is best for the stock market. And as the market generally leads the real world economy, not surprisingly the fourth year of a presidency is better for economic growth.
Norris points out in George W. Bush’s third year — 2007 — the market only made small gains and started crashing at the end of that year, thanks to the GFC, but history certainly builds a good case for 2011.
From 1946 to 2009, some 62 per cent of economic growth came in the back two years of a presidential term. The first two years only yielded 38 per cent growth.
I loved this calculation from Norris: “An investor who owned stocks during the third year of terms and stayed out of the market during the other years, would have earned profits more than twice as great as those that went to an investor following the opposite strategy.”
Of course, presidents coming up for re-election or hoping to see his/her party re-elected after a retirement will make decisions to help the economy and his political popularity. Last week’s Obama deal with the Republicans to extend the Bush tax cuts and to extend unemployment relief will both stimulate the economy and Obama’s Facebook followers.
Arguments for shares
- The S&P 500 Index, adjusted for inflation, shows shares only failed to deliver in one “third year of a presidency” and that was 1949.
- The median rise in the index for “a third year” was 18 per cent.
- Over the 1946-2009 period, economic growth averaged 3.2 per cent.
- But most first and second years of a presidency came in under 3.2 per cent.
- While half of the third years went up by that much, 75 per cent of fourth years topped this growth rate.
What I found interesting was the revelation that in the 1980s and 1990s most years actually produced growth better than 3.2 per cent, but in the 2001-2010 decade only in 2004 did growth get to 3.2 per cent. At the same time, the US stock market failed to keep pace with inflation.
This says a lot about the importance of economic growth for share prices and it outlines the challenge for investors in 2011.
Risk play
If you believe the China story and that the US can achieve the high economic growth rates predicted by Goldman Sachs and you believe the debt challenges won’t come back to bite us over the next few years, then history says the stock market is the place to be.
And this is why market experts call investing in shares — the risk play!
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Published on: Monday, December 13, 2010
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