Voting for an Election-Cycle Boom

01/26/2007 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

As more presidential candidates throw their hats in the ring, Bernie Schaeffer, chairman and CEO of Schaeffer's Investment Research, sees good historical precedent for a bullish 2007 because it's the third year of the current commander-in-chief's term...

"Going back to the early 1960s, the average return for the Standard & Poor's 500 index (SPX), during the third year of the Commander-in-Chief's cycle, has been nearly 20%. For the first quarter of the third year of the Presidential cycle (back to 1970), we see an average return of nearly 10% for the January-March period. Therefore, the quarter produces nice gains within the historically nice years.

"Furthermore, studies have shown that the market has a strong tendency to rally by roughly 50% from its mid-term year low to its subsequent peak in the third year. This played out in 2002-2003 to the tune of a 45% rally from the 2002 lows. A 50% rally off the 1,219.29 low in 2006 would take the S&P 500 Index above 1,800 in 2007, if this scenario were to again play out.

"The market also stands to benefit from the political environment in Washington. With the GOP manning the executive branch while Democrats hold control of the legislative arm, the air in D.C. may be ripe with compromise (or even periods of gridlock).

"Such inaction is actually viewed as positive for the stock market, which is allowed to progress forward without having to respond to major legislative changes that affect corporate practices. Heading into the 2000 election, economist Ed Yardeni noted: "I wholeheartedly encourage people to vote for gridlock: It's good for Wall Street, and for Main Street too."

"Going back to 1928, the stock market, when under bipartisan rule in the nation's capital, has held an advantage over markets overseen by a single party. During the most recent five years of bipartisan rule in the US (when Bill Clinton worked alongside a Republican-dominated Congress), the S&P 500 index and the Dow Jones Industrial Average returned, on average, about 24% and 23%, respectively, each year through 2000, when the technology bubble burst, resulting in modest declines for both averages during the election year.

"As President George W. Bush, in his penultimate year in the Oval Office, works with a fresh-faced Senate to keep the promises of "partnership rather than partisanship." American companies may enjoy a silver lining to some bureaucratic inertia."

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