Stock Market to Advance 30% over the Next Year

Got your attention, didn’t I? While the headline sounds crazy, if history were to hold true it could happen. There has been a flood of articles recently discussing how the market has done in the third year of a presidential term (beginning of the 4th quarter through the end of the 3rd quarter the next year) and all point to a strong year. Of course, none have faced the economic plight we are in now, right? Wrong. Even going back to 1932 (Great Depression) there has been 19 years like this and none of them have seen a negative year in the U.S. stock market according to Jeremy Grantham, the chief investment strategist at GMO, the Boston-based money management firm. Some reports show that since World War II the S&P 500 has averaged 30% in this year of the presidential term while others peg the average return at a lower, but still robust, 18% since 1942. No matter how you slice it this could be a special year. Returns tend to be good during the third year of the presidential term due to shifting concerns over the economy, a new congressional makeup, and fiscal and monetary stimulus all of which sounds kind of familiar doesn’t it?

Other issues will certainly come to bear in the coming year. Tax issues are all the rage right now as everybody waits on Congress to work on an extension or make permanent the Bush tax cuts. Everyone recognizes that now is not the time to play Russian roulette with the economy by raising taxes but yet there has been no action on the extension. The markets will likely react positively if there is an extension and that could help ensure that President Obama doesn’t become the first President since Herbert Hoover to show a negative return during the third year of his first term.

Today the Federal Reserve announced that they expect slower growth in 2011 which may mean further stimulus action and may force Congress to finally get something done in regards to tax rates. Corporate profits are expected to slow some as well. And finally, with today’s news concerning a military conflict in Korea and the potential (probable?) need for a bailout of Ireland by the European community we are reminded that world events will impact our markets as well.

On a positive note, we do have much to be thankful for this fall….a slightly improving jobs picture, stronger markets, a Badger football team on the verge of going to the Rose Bowl, and all the freedoms we enjoy as Americans. The glass is certainly half full – if not more!

Happy Thanksgiving!

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