(This makes sense as folks that are making money in their portfolios are much happier than those that are watching their portfolio values dwindle daily.)
According to a study done by Pepperdine University, if you had invested $1,000 in the Dow Jones Industrial Average every election cycle on January 1 of the first year of every Presidential term and sold on October 15th of the second year since 1950, your $1,000 would today be worth approximately $650 – not inflation adjusted. On the other hand, had you invested $1,000 on October 15th of the second year of every term and sold on December 31st of the last year of every Presidential term since 1950, your $1,000 would now be worth more than $70,000. Can this be a coincidence? I think not.
History shows us that fiscal and/or monetary stimulus shows up in the third and fourth year of terms, which in turn NORMALLY helps the economy and markets. The election comes, folks feel all warm and fuzzy, and then vote for the incumbent. At least this is supposed to be the way it works. But, alas, this time is truly different.
We have seen every kind of stimulus known to man (and I am sure many still await additional stimulus from regulators before tomorrow comes) and yet the real economy and markets have not responded. It is like being a doctor calling for the crash cart and applying emergency technique available but eventually the doctor just has to pull the covers over the patient. I really do not like using that analogy at present as our family unexpectedly lost our 8-year-old Lab, Luke, last week, but it is the one that I think is the most appropiate. The patient, in this case, is the US and global economy, which are not responding to stimulus.
If I had told you a year ago that we would have the Fed back-stopping the JPM/Bear Stearns deal, the Fed creating all sorts of ridiculous term lending facilities, money supply growing at alarming rates and Fed funds falling from 5½% to 2%, you would think that the economy, credit and equity markets would be roaring, right?
They are roaring, but in the wrong direction. So once the election (which ought to be a delightful mud-slinging affair) is over, no matter who is victorious, the stimuli we have witnessed may very well be removed. And if the economy and markets haven’t responded to this latest round of record stimulus, just take a guess how they will do without it. Just imagine a cardiac ward without a crash cart and I think you will get the picture.
There are other reasons to expect a 2010 low as well. Secular bear markets tend to last 16 years or so, which for new folks in the business will feel like an eternity. The preceding secular bull market lasted 18 years from 1982 – 2000 and was the giddiest secular bull market of them all. With that incredible run now well behind us, we suggest that this current secular bear market will take the biggest toll as we recover from the last party-induced hangover of 1982 – 2000.
It is okay by us as we are positioned in a risk-averse fashion with tight risk controls firmly in place. In the midst of these long-term secular moves come shorter-term cyclical moves that last 3 to 4 years. Consider that the secular bear started in 2000 (at the height of the “dot-com” era) and began with a 3-year, gut wrenching, 50% cyclical bear move into 2003, which in turn led to a 4-year, 100% move back to the 2000 highs by 2007.
It’s funny how arithmetic works. If you had simply stayed invested the whole time from 2000 – 2007 you would have nothing to show for it except a lot of aggravation and used up “emotional capital”.
