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Stock Market Double Dip? But We Have An Election Coming Up

Sept. 29, 2010 by Samuel Chong

When many people fear that there would be a second dip, it may not come. 

In the last a few months, many economists and stock market forecasters predicted or feared for a second dip of recession, or the stock market prices.  The news and articles about the "second dip" were all over the places.  However, history has told us that when many people fear that certain things would happen, and when it is reported in the press, it will not happen.

Examples would be the millennium bug before 2000, as well as the fear of another 911 event.  Therefore, we believe that Warren Buffett is correct in saying that there won't be a second dip, or a second recession soon.

On the contrary, the stock market has shown a pattern before elections.  History and statistics show that the stock market generally goes up before the elections. 

A detailed research by Marshall D. Nickles, EdD shows that a profitable strategy would be to invest on October 1st of the second year of a presidential term and sell on December 31st of year four. After laying out the data to support this strategy, he goes on to say:

“However, just when you think that you have figured it all out, you find another pattern that can suggest different possibilities. For instance, another analysis shows a highly intriguing re-occurrence in the stock market index. During the entire twentieth century, every mid-decade year that ended in a “5” (1905, 1915, 1925, etc.) was profitable!”
The point he is making is the same point that a field of study called behavioral finance has told us over and over again; we may see patterns, but that doesn’t mean they are relevant to the decisions we are about to make.

In a study similar to Marshall’s, Wells Fargo’s Chief Investment Officer, Dean A. Junkans, CFA, and their Senior Investment Manager, James P. Estes, PhD, CFP(1) show that the average market return in the fourth year of a presidential term is twice that of the return in the first year of a president’s term.

Thus, we believe that the US stock market is likely to go up soon.  Below is a table that shows the data

S&P 500 Stock Market Returns
During Election Years
Year Return Candidates
1928 43.6% Hoover vs. Smith
1932 8.2% Roosevelt vs. Hoover
1936 33.9% Roosevelt vs. Landon
1940 -9.8% Roosevelt vs. Willkie
1944 19.7% Roosevelt vs. Dewey
1948 5.5% Truman vs. Dewey
1952 18.3% Eisenhower vs. Stevenson
1956 6.5% Eisenhower vs. Stevenson
1960 .50% Kennedy vs. Nixon
1964 16.5% Johnson vs. Goldwater
1968 11.1% Nixon vs. Humphrey
1972 19.0% Nixon vs. McGovern
1976 23.8% Carter vs. Ford
1980 32.4% Reagan vs. Carter
1984 6.3% Reagan vs. Mondale
1988 16.8% Bush vs. Dukakis
1992 7.7% Clinton vs. Bush
1996 23.1% Clinton vs. Dole
2000 -9.1% Bush vs. Gore
2004 10.9% Bush vs. Kerry
2008 -37% Obama vs. McCain

Should you invest in the US stock market?  Only if you believe that the pattern will continue.  You may also consider other factors such as the possibility of the depreciation of the US dollar as well as the possibility of inflation.

Thus, the decision is yours.



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