A Divided Country can be Happy

12/29/2006 12:00 am EST

Focus:

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

In his comprehensive analysis of elections past, Mark Skousen makes some interesting discoveries, finding results that should make investors happy. Here, he offers his subscribers a peek at his positive predictions for the 2007 markets.

"Last January, I forecasted that the US economy was likely to grow 3-4%, with stocks at an all-time high, over 11,000 on the Dow. The Dow is now over 12,000.

"I also suggested that international stocks would outperform US stocks. The Dow Jones World-Ex U.S. (WLDOW) Index is up 21% this year; the US stock indexes are up 13-14%. And I correctly predicted that the dollar would weaken and gold would rally.

"For 2007, I see higher prices for stocks. The political election cycle is an important indicator. Historically, the ideal government for Wall Street is when we have a Democratic president and a Republican Congress. Indeed, 1994-2001 was incredible for the stock market, probably the best ever. The second best period is a virtual tie between an all-Democrat government, or a Republican president and a Democratic Congress--the one we will have for the next two years.

"A divided government probably works well because sharing power keeps the government from passing radical legislation. Typically, the best period is the 12-month period before an election year, called "The Pre-Election Stock Rally."

"From Andrew Jackson's first administration in 1833, through all 43 administrations since, the last two years (pre-election year and election year) produced a total net market gain of 746%, more than twice the gains of the first two years of these administrations. And the biggest returns tend to come the year before a presidential election year. For us, that's 2007.

"What's the rationale behind the four-year political cycle? Presidents tend to make the most painful decisions in their first two years. Such tough decisions include fighting inflation, cutting back on wasteful spending, and starting wars.

"However, the second half of each presidential term is a different story. Presidents need to be reelected and they "prime the pump" and encourage a period of prosperity and bull markets. A textbook example occurred during 2001-4.

"My only concern in 2007 is the possibility of a dollar crisis, which could spread to other markets and lead to a stock market crash. It's hard to believe the dollar is as weak as it is right now. It should rally. But there's always risk when the Fed manipulates money and credit by artificially lowering and raising interest rates. Your best protection against this possibility is to maintain a 10% position in gold and commodity funds."

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