Easy Street Investing

A big stock rally in … 2011?

Nilus Mattive

I don’t consider myself a political person. I don’t stay up late on election nights to tally results. Nor do I put signs up in my front yard. In fact, my personal views about the way our great country should be run don’t even fit into any of the mainstream viewpoints.

Regardless, as an investor, I am very interested in figuring out how a new Administration will affect different assets, especially stocks. I try to remain as objective as possible when doing my analysis. I let the numbers do the talking, and adjust my strategy … rather than trying to make the numbers fit my strategy or worldview.

With that in mind, I recently did an in-depth study of 81 years worth of stock market data to help my Dividend Superstars subscribers understand what Obama’s election could mean for their portfolios. And today, as our new President officially takes his place in the White House, I want to share the essence of my findings with you, too.

According to My Presidential Cycles Study,
Stocks Should Gain — Modestly — in 2009 and 2010

Based strictly on past Presidential cycles, 2009 will be positive for stocks but produce a below-average return. The first year of a Presidential term is historically the worst for stocks.

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On average, the S&P 500 has risen just 3.1% in the first year of a new President’s term. However, the first year of a Democratic candidate has produced a much better average performance — an 8.9% gain vs. a 2.78% loss under a Republican (the only negative number in the party averages).

Keep in mind that my 81 years of data (1928-2008) includes 41 years of Republican leadership and 40 years of Democrats, so the results shouldn’t be skewed because of unequal representation.  

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Speaking of political parties, my study led to another interesting conclusion: Overall, stocks have done much better under Democrats, with an average increase of 10.1% vs. 3.1% under a Republican White House.

In terms of Democratic leadership, the second year is typically the weakest for stocks, producing a gain of 4.29%. That would make 2010 another rough one for the markets.

Of course, the current climate is hardly typical. Much will depend on how swiftly and effectively the new Administration handles its massive challenges.

Obama has already announced his intention to launch the largest infrastructure initiative since Eisenhower developed the U.S. highway system about 50 years ago. He is pushing for the release of the second half of the $750 billion in bailout money approved by Congress. And he is aggressively arguing for another $850 billion in new stimulus measures.

Only time will tell how successful these moves are. But so far, the bailouts have a very limited impact on our nation’s current state of affairs.

If the market doesn’t take off immediately, don’t be shocked. As past Presidential cycles demonstrate, it often takes a few years for an Administration (and companies) to see the benefits of new initiatives.

In Fact, the Third Year of a President’s Term
Is Typically the Strongest for Stocks

Strictly going by the numbers, we can expect 2011 to be a very good year for stocks. Under all Presidents from 1928, the third year of a White House term produced an average annual gain of 14.12%. And in a Democrat’s third year, the gain averaged a whopping 17.7%!

I find that extremely interesting, especially in light of what top economists are forecasting right now — a deepening recession through 2009, and a housing market bottom sometime in 2010.

In other words, based on current fundamental analysis, 2011 would in fact be the light at the end of the tunnel for the U.S. economy. Overlay that with my Presidential cycle model and all indicators point to the same thing — a big rally in 2011.

Again, these are atypical times … and history never repeats itself perfectly. But I do think looking back at long spans of time can provide us with interesting investment insights. And if the Presidential cycles demonstrate anything, it’s that stocks will post solid gains under Obama … even if we have to wait a couple years to see Wall Street celebrate his inauguration.

Best wishes,

Nilus



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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.

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