Economic Forecast 2007: Why "Old Faithful" Will Push Stocks Higher
by Dr. Mark Skousen, Editor, Investment U
Sunday, December 10, 2006: Issue #616
"The four-year Presidential Election/Stock Market Cycle is the 'Old Faithful' of indicators for us." - Yale Hearst, The Almanac Investor
Last January, doomsayers and gold bugs predicted that the U.S. economy and Wall Street would tank - and maybe even collapse - in 2006.
In my newsletter, I debunked them, saying, "You're all crazy! Barring another major terrorist attack or an unexpected crisis, the U.S. economy is likely to grow 3%-4% next year. And stocks will probably be at an all-time high, over 11,000 on the Dow."
I also suggested that international stocks would outperform U.S. stocks, that the dollar would weaken, and that gold would rally.
As I write, the Dow is over 12,000, global stocks have outpaced U.S. equities by 7%, the dollar is down and gold is up. As the old saying goes, "Bears make headlines, bulls make money." Now for my 2007 economic forecast (When it comes to investing, I'd rather be right than famous)...
2007 Economic Forecast: Profiting in the Stock Market from the Political Election Cycle, "Old Faithful"
What do I predict for the coming year? First and foremost, I see higher prices for stocks.
The political election cycle is an important indicator what the Stock Trader's Almanac calls "Old Faithful." Typically, the best period for stocks is the 12 months before an election year. It's called "The Pre-Election Stock Rally."
If you look back at the last 43 administrations, starting with Andrew Jackson's in 1833, you will see that the last two years of each (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.
To give you an idea of the potential explosive nature of the stock market in these periods, here is the chart of the Dow Jones Industrial Index from 2000 to 2004...
Notice the remarkable bull market that kicked off in 2003. It could happen again in 2007, though I doubt it will be as explosive.
Why the 4-Year Election Cycle Makes Sense for the Economy
What's the rationale and outlook behind the four-year political cycle?
Presidential elections have a major impact on the economy and the stock market. Presidents tend to make the most painful decisions in the first two years of their administration, such as fighting inflation, cutting back on wasteful spending and starting wars. Wars, recessions and bear markets usually get started in the first half of the term.
However, the second half is a different story. Presidents need to be re-elected and they "prime the pump," encouraging a period of economic prosperity and bull markets - 2001-2004 was a textbook example.
In addition, we have a "gridlock" government in 2007, which is good for the stock market.
Of course, there are risks...
My only concern 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 right now. It should rally. But there's always risk in the economy when the Fed manipulates money and credit by artificially lowering and raising interest rates.
Your best protection against this economic possibility is to maintain a 10% investment position in gold and commodity funds.
P.S. Take a look at Investment U's recent piece on the latest findings from the Index of Economic Freedom and the best way investors can profit.
Today's Investment U Crib Sheet
The pre-election stock rally is one of several cyclical events that affects the stock market. For more, we recommend The Almanac Investor: Profit from Market History and Seasonal Trends, by Jeffrey A. Hirsch and J. Taylor Brown, available at Amazon.