There is much information suggesting that the stock market will have a great year because of the upcoming Presidential election.  One of the reasons for this position is that the President – and to a lesser extent Congress – will do everything in their power to have the stock market rise so that they can be re-elected.  This  cycle – known as the Presidential cycle – became a phenomenon in 1994.  That is when Adam White drafted a piece showing that excess returns were actually achieved by being fully invested the two years before a Presidential election while avoiding the first two years after an election.  These are the results Adam presented for the Presidential cycles from 1912-1992:

Dow Jones Industrial Average

• Post-election Year:      +4.7%
• Mid-term Year:             +2.3%
• Pre-election Year:        +11.0%
• Election Year:               +7.0%

The results seem compelling. However, our most recent Presidential cycle  did not follow this trend.

Dow Jones Industrial Average

• Post-Election Year (2009):   +18.82%
• Mid-term Year (2010):          +11.02%
• Pre-election Year (2011):     +5.53%
• Election Year (2008):            -33.84%

The results are opposite of what the Presidential election cycle would suggest would happen.  In fact, an investor would have generated a -30.1% return over the past 4 years if they only invested in the stock market during the pre-election and election year and stayed in cash for the final two years.  This is why we believe it is important to use more than one indicator when making investment decisions.  Keep in mind that the Dow was up 5% in 2011 when most stocks were down last year – the equally weighted Value Line Composite Index of over 1,700 stocks was down 11%.  The Dow is not necessarily a good indicator of the return for the overall market because it is weighted based on the share price of the stocks in the index.  This causes the return to be skewed towards the stocks with the highest share price.  IBM, with a share price of $179, has the largest weighting in the index of greater than 10%, while Bank of America’s weighting in the index is .40%.

EUROPE FOLLOW-UP

Last Friday, more European countries had their credit rating downgraded.  This caused the Euro to reach 16 month lows.  The situation in Europe has not improved from last year.  There is still significant risk to the global economy.   China is especially vulnerable since Europe is their largest trading partner.  The human tragedy that is now hitting Greece, will likely hit the other PIIG countries if Europe does not figure out a way to balance trade between countries.  The Euro is not just a financial crisis, but a social one as well.

Sincerely,

Your THOR Team