Market Milestones to Watch for in the Months to Come
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
With the whipsaw trading we’ve seen of late, it appears that the U.S. financial markets are already chewing through the post-election honeymoon. I have to say that I, for one, am relieved that’s the case because it signals that the markets are already returning to normal.
I realize it may not feel that way, but there’s one very important thing to remember: We nearly always seem to receive the best news near, or at, market tops, and the worst news near, or at, market bottoms. Although that seems contradictory, it actually makes sense. And investors can take some solace in the fact that the mounting tide of bad news is an important part of the bottoming process.
Speaking of which, studies show that the most dangerous time for American markets (and U.S.-centric investors) is when one political party controls all the marbles. It doesn’t matter which one, either – Republican or Democrat. The reason is clear: Single-party control typically brings out the very worst in big government in the form of higher taxes, magnified spending, and even war. As my friend, economist Mark Skousen, recently noted, “every one of the major wars involving America occurred during one party rule: World War I, World War II, Korea, Vietnam and Iraq.”
According to studies conducted by researchers at Ned Davis Research, the best thing financially would be to have a divided government and gridlock. In short, the Dow Jones Industrial Average Index logs its biggest net gains with a donkey in the White House and elephants traversing the halls of the U.S. Capitol Building. During such periods – with a Democrat in the White House and a Republican Congress – the stock market generates an average return of 9.6% a year.
People assume that a presidential administration and Congress with matching political affiliations is the best way to get things done, but in reality, the checks and balances of a mismatched pair helps to ensure that governmental agendas don’t go to extremes. Thus, somewhat surprisingly, political gridlock is actually a reality that puts investors at ease and permits the financial markets to operate efficiently.
|
Obviously, with Democratic President-elect Barack Obama coming into office in the New Year, along with an even stronger Democratic Congress, we’re not going to have such gridlock-generated returns to look forward to.
But fret not: Another interesting conclusion suggested by our own research, and that of Ned Davis and other research firms, is actually quite promising. In stark contrast to what most investors believe to be true – that Republicans are better for the markets – the fact is that the blue-chip-dominated Dow tends to rise nearly twice as fast during Democratic presidencies (7.2%) as it does during Republican ones (3.8%).
The great equalizer, if there is one, appears to be inflation, which rapidly eats away the higher returns to bring them within a few basis points of each other over time.
And with the U.S. government having injected roughly $3 trillion in bailout money into the financial markets, an inflationary environment may well be in our future.
Rest assured, we’ll continue to monitor the markets and keep you informed of all the latest developments. In fact, if you haven’t already, tune in on our just-started “Money Morning Outlook 2009” global investing forecasting series.
Our “Outlook 2008” series was so well received that we ultimately published it as an investment playbook. This year, our series is even more comprehensive. We’ve already published our forecasts for the Obama Administration and how its policies may affect the U.S. market, for the U.S. economy and for the stock market. And we’re planning individual reports on gold, oil, housing, Latin America, China, retail sales, biotechnology, alternative energy, income investments – and more. Stay tuned to Money Morning.
News and Related Story Links:
- Money Morning Market Commentary:
When Gridlock is Good: Why a Contentious Election and Legislative Bottlenecks Pack a Profit Punch for Investors. - Money Morning 2009 Economic Outlook Series (Part I):
Money Morning Outlook 2009: Obamanomics Offers Investors Plenty of Profit Plays in the New Year. - Money Morning 2009 Economic Outlook Series (Part II):
For the U.S. Economy in the New Year, the Pain Will Precede the Promise. - Money Morning 2009 Economic Outlook Series (Part III):
Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009.
Comment by D Wetzstein on 13 November 2008:
I wonder if the author even understands what he is writing.
On one hand he states that history tells us that the Dow increases nearly 10 percent per year with a Democrat President and Republican Congress, Then goes on to say in the very next paragraph that “don’t fret” because YOUR OWN RESEARCH actually shows the opposite. Even though people think that Republicans are better for the economy, it is better when there is a Democrat President.
Sorry, but you just spun the first comment that if there is a Dem. Pres. and Repub. Congress the economy grows and when there is a Dem. Pres. and Dem. Congress it is bad.
WHICH IS IT? MAKE UP YOUR MIND. Or is Kieth Fitz-Gerald a coolaid drinker who gets confused by facts even as he explains them? That is what I see…
Our country is in for a bad four years. The Democrat majority in Congress is responsible for the credit debacle and now with a Marxist (that’s right I said it) in the White House, the new President will “rubber stamp” all the socialist ideas that will pour out of Congress. All I can say is GIRD YOUR LOINS.
Comment by Hal Buhr on 13 November 2008:
Keith- You can massage the data set all you want, but there is scant evidence that D or R control will lead us off a cliff. The Bush admin without a mandate, tilted hard-right and the long-term effects of deregulation plus Greenspan’s foolish logic of keeping rates too low for far to long have taken us to a place we have never been. The starve-the-best crowd, like Stephen More and Larry Kudlow, will love this since it basically puts handcuffs on future Federal growth and spending. The only thing we don’t know is how far you can stretch the economy before you reach a tipping point and fall into a depression, but the R’s have done their best to find that point. Obama and the D Congress will have to delay or decrease their agenda, although, I think the opportunity for “going big” and becoming truly great it there like it was for FDR in 1932.
Comment by Felix on 13 November 2008:
I’m sorry for the employees of the 3 auto companies BUT Aid $$
to them would be down the drain without an economical product to sell. Trash the remaining suv’s and get together with the electric start-up companies and you might have a plan for fast production of ELECTRIC cars – our FUTURE. Read
Felix Kramer they have tons of info on
electric cars and companies !
Felix Kramer
Comment by Felix on 13 November 2008:
Felix Kramer electric car site
Comment by Felix on 13 November 2008:
Evidently you don’t want to print the web site of CALCars ?
Comment by H. Craig Bradley on 13 November 2008:
Please translate “Kuda-Kuda-Paw” into English for me. I would like to know its meaning, to the fullest extent possible. Spelling may be incorrect, as I only once heard it said. Understand it may be a “pet word” in Tokyo.
Pingback by Market Milestones to Watch for in the Months to Come on 14 November 2008:
[...] Market Milestones to Watch for in the Months to Come …political party controls all the marbles. It doesn’t matter which one, either – Republican or Democrat. The reason is clear: Single-party… [...]
Comment by Scott on 14 November 2008:
The title does not match the article. Is there an article out there that this title goes to? Because I’d like to read it. Maybe I should look for a title that says something about politics…..
Pingback by The Five Keys to Value Investing Profits on 20 November 2008:
[...] Be Patient: Investors have fled the markets in droves lately. According to TrimTabs Investment Research, mutual fund investors have pulled $175 billion out of stock funds so far this year, with $56 billion of that capital exodus taking place in October alone. This is the first year that equity flows have been negative since 2002, which reaffirms something we frequently point out: Investors tend to rush in at market tops and out at market bottoms. And that suggests that we may be approaching a bottom – even if it’s not immediately app…. [...]
Pingback by cnwins - The Five Keys to Value Investing Profits on 24 November 2008:
[...] * Be Patient: Investors have fled the markets in droves lately. According to TrimTabs Investment Research, mutual fund investors have pulled $175 billion out of stock funds so far this year, with $56 billion of that capital exodus taking place in October alone. This is the first year that equity flows have been negative since 2002, which reaffirms something we frequently point out: Investors tend to rush in at market tops and out at market bottoms. And that suggests that we may be approaching a bottom – even if it’s not immediately apparent. [...]
Comment by Andrew on 30 November 2008:
This quote is misleading:
“In stark contrast to what most investors believe to be true – that Republicans are better for the markets – the fact is that the blue-chip-dominated Dow tends to rise nearly twice as fast during Democratic presidencies (7.2%) as it does during Republican ones (3.8%).”
The Dow Jones does not represent the entire economy and in addition, Democrat presidents have had different economic policies.
Pingback by The Five Keys to Value Investing Profits | Geiger Index - Keith Fitz-Gerald on 17 December 2008:
[...] Be Patient: Investors have fled the markets in droves lately. According to TrimTabs Investment Research, mutual fund investors have pulled $175 billion out of stock funds so far this year, with $56 billion of that capital exodus taking place in October alone. This is the first year that equity flows have been negative since 2002, which reaffirms something we frequently point out: Investors tend to rush in at market tops and out at market bottoms. And that suggests that we may be approaching a bottom – even if it’s not immediately apparent. [...]
Pingback by Market Milestones to Watch for in the Months to Come | Geiger Index - Keith Fitz-Gerald on 18 December 2008:
[...] Keith Fitz-Gerald Editor, Griger Index Investment Director Money Morning Investment News/The Money Map [...]