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Regular readers of our column recognize that every once and awhile some issues not sufficient enough to comprise an entire article accumulate so we put together a “hodge-podge” like column. Like other times when we have done this, some of these topics provide little tidbits of insight while others are profound. Enjoy.
Not surprisingly, according to a study completed back in 2006 by Professors Michael Ferguson of the University of Cincinnati and Hugh Douglas White of the University of Missouri and related in an article by Mark Hulbert, “the Dow between 1897 and 2004 produced an annualized return of 5.3% when Congress was out of session, in contrast to just 0.4% when it was in session.” Why does this occur? Within the study completed by the two professors and noted in Hulbert’s article is a quote in 1930 from Will Rogers. “This country has come to feel the same when Congress is in session as we do when a baby gets hold of the hammer. It’s just a question or how much damage he can do with it before we take it away from him.” Enough said.
Continuing along the topic of how markets historically respond to politics, when examining the four-year Presidential Election Cycle, according to SeasonalCharts.com, this year, the Midterm Election Year, the stock market has provided little or no return. Furthermore, any return that is realized typically comes during the fourth quarter. It makes sense. Presidential Administrations, no matter which side of the aisle, initiate programs, reforms and push forth policies that typically come to a head during this year. This year is no different. Consider the Cap and Trade Energy Policy, Health Care Reform, Financial Regulation and the push for higher Personal Income Tax Rates. Thus far this year, this has resulted in a flat stock market. Case in point, year-to-date, through the end of July the Dow Jones Industrial Average has risen just 0.36% while the index that provides the broadest look at stocks, the Wilshire 5000 Total Market Index has fallen 0.04%. Despite this lackluster performance, we are holding on to our outlook for the stock market which we first presented in writing within our Q1 2010 newsletter, The Fagan Financial Report, that “stocks move in fits and starts, but end the year modestly higher, perhaps by high single digits.” We are expecting that a reestablishment of the balance of power in our elected offices, much like the 1994 mid-term election, could provide the catalyst for a year-end push higher.
Topic number two. Since the Dow Jones Industrial Average was first introduced back in 1896, the months of July and December have provided the greatest average returns logging gains of 1.4% per month. However this is closely followed by the month of August with an average of 1.3%. That said, then why don’t investors continue to pile into the stock market at this time? The reason is clear. The month of September provides the worst return with the Dow falling an average of 1.2%.
THE BOTTOM LINE – Usually when a statistically anomaly becomes widely accepted it fails to provide any guidance. We don’t use any one particular statistic as gospel. However, we do take all rational ones into consideration when investing client portfolios. We hope this article will help you.