Market Historian predicts Dow Rally to 16,000
An article in Registered Rep magazine in November tells the market forecast of Curtis Teberg, a portfolio manager based out of Minnesota. Teberg puts the Dow at 16,000 by December 31st, 2007, a 33% increase over its value on October 1st. Wow! I’d better start loading up on blue chip stocks. Apparently I’ve already missed out on a 6.2% move in the Dow since October 1st! Or, is this an unfounded and spontaneous move? Check out the basis for this forecast and see how it sits with you.
Teberg shows the 15-month returns of the Dow Jones, S&P 500, and NASDAQ beginning October 1st of pre-presidential election years and ending on December 31st of the following year. The results are commendable. The average return of the Dow Jones over the last 5 of these 15-month pre-presidential cycles is 35.15%. For the S&P 500, 35.44%, and for the NASDAQ 62.65%. The NASDAQ number, while it may seem high, is likely a reflection of a massive return between October 1st of ’98 and December 31st of ’99.
When asked why he suspects the markets rally after midterm elections, this was his response:
“Post-midterm elections are a time when Americans clamor for change. “We think if things are good, they’ll get even better; and, if things are bad, they’ll improve. “The changing of the office and the campaign rhetoric gets people excited about the markets.”
What do you make of this? When going back to 1926, rather than just the past 5 cycles, the results only produced one 15-month cycle (1930-1931) with a negative performance.
I think the theory could hold some legitimacy. We seem to be in one of those political cycles now in which many Americans are expecting change and feeling optimistic about the future. We saw a shift in Congressional power last month and the media is already offering predictions and speculation about the presidential race to come. Combined with the fairly sideways market which has bored investors since the tech bubble, perhaps we are due for this political excitement and the ensuing rally in the major averages.
If you have any questions or comments, please feel free to contact me.
Russell Bailyn
--
Wealth Management
Premier Financial Advisors
14 E. 60th Street, #402
New York, NY 10022
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Comments
Russell,
I'd agree with the market historian about elections and people buying into thinking positive change. I also feel the market will go higher. I'm just curious if the market will tank mid-Jan '07 or move higher through the first 6 months of the new year. I think it depends on what stocks you own to suggest the market going sideways. Only poorly performing stocks have really moved sideways since around Sept '06. Stocks that move have kept their uptrend. I'm waiting for a big reversal then see the DJIA goto $13-16k.
Posted by: the finance ninja | December 22, 2006 10:46 AM
I recently presented some information on my blog about fifteen year normalized P/E ratios and long-term returns. After posting this, I received an email question about the election cycle, because the reader noted that the third year of an election cycle is normally very strong, but my data showed buying in a high normalized P/E year (which 2006 is) generally leads to poor results. The reader was hoping the election cycle effect would "win out" so to speak and the fact that the market is pricey on a normalized basis wouldn't matter.
Anyway, because of this email, I ended up doing a whole post on normalized P/E ratios and the election cycle. It's a very long post, but you may be interested in reading it given the topic:
http://www.gannononinvesting.com/2006/12/on_normalized_pe_ratios_and_th_1.html
Please keep in mind that I measured the difference between yearly averages in the Dow – not what would happen if you bought on the first day of the third year of the election cycle and sold on the last day. So, the one-year point changes in the Dow I mention (going back to 1938-1939) are not the same as what people are usually referencing when they discuss the election cycle. Still, the average point growth in the Dow among this group was 14.99%. So, this election cycle effect really has worked in the past.
Posted by: Geoff Gannon | December 22, 2006 05:25 PM
You gave an example of the average of the last 5 instances. What is the average for the last 20 or so?
Posted by: Dustin | December 28, 2006 11:38 AM
Hi Dustin,
As mentioned by Mr. Teberg, when going back to 1926, rather than just the past 5 pre-election cycles, the results only produced one 15-month cycle (1930-1931) with a negative performance.
-Russ
Posted by: Russell Bailyn | December 28, 2006 06:07 PM