History doesn’t repeat itself, but it sure does rhyme.
Dave Gilbert here, Editor of Smart Money.
That nugget of wisdom is attributed to Mark Twain, the famed American author and humorist who had pretty keen insight on what makes us tick.
This rhyming of history is evident in the stock market as well. Nearly every major event, big move, or trend has some type of historical antecedent that can help us think about what’s to come.
One of those historical patterns is especially relevant now that the midterm election is behind us. It’s part of the presidential cycle in the market.
It’s actually the good part. The cycle is pretty reliable, and it looks as if it may be about to rhyme once again, independent of the results that continue to come in.
And if it really is rhyme time, investors have reason to be pretty excited…
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The Best Year of the Cycle Is Dead Ahead
The presidential cycle was first articulated by Yale Hirsch, who created the Stock Trader’s Almanac more than half a century ago.
Broadly speaking, the theory goes that presidents spend the first two years of their term trying to fulfill campaign promises, and they spend the last two years trying to strengthen the economy in the hopes of getting reelected.
With the midterm election now complete, we are entering the back half of the cycle – and more specifically, we are entering the third year, which is far and away the strongest. You can see it in this table LPL Research published two years ago…
Returns in the third year of the presidential cycle are at least 2.5X greater than each of the other three years.
By that measure, now is not the time to be on the sidelines. Note, too, that the second year is historically the weakest. That seems likely to be true again in this cycle.
This is not just a short rhyming limerick; this is more of an epic poem. The Dow has consistently risen up to and after midterm elections for much of the past 90 years.
Getting through the election isn’t just nice because we don’t have to see the same commercials over and over again, but also because the market usually strengthens considerably in the year ahead.
More Reasons to Anticipate Higher Prices Ahead
But… we’d be crazy to ignore the dark clouds that have made 2022 a down year for most of us (except Eric Fry’s services, which are all positive for the year).
Just because this historical pattern has proven itself time and again doesn’t mean it won’t be impacted by those persistent clouds.
Even so, Eric and our other InvestorPlace analysts strongly believe that now is a time to buy quality companies at very attractive prices. They may not go straight up, but much of the downside is likely already priced in, and the presidential cycle is yet another reason to anticipate higher prices in the coming year.
Eric is about to release his new Investment Report issue to his subscribers – you can learn how to join by clicking here – but if you’re wondering what to do now, let me share his advice to readers in the current issue…
Several inflationary factors have been moderating for months.
The Baltic Freight Index, which measures shipping rates to transport dry goods, topped out a year ago and has dropped 70% since then.
Similarly, the New York Fed’s Global Supply Chain Pressure Index peaked last December and has tumbled 65% since then.
The commodity markets are telling the same story. Commodity prices, as measured by the Refinitiv/CoreCommodity CRB Index, have slipped 15% during the past three months.
As these deflationary trends work their way through the economy, the monthly CPI readings should decline, perhaps sharply.
Lastly, contrary to popular belief, the stock market can rally during periods of rising interest rates. In fact, historically, that has happened more often than not.
Why? Rather than fixating on rising rates, it “looks ahead” to the end of a rising-rate cycle.
During the past 45 years, the Fed has conducted eight major rate-hike campaigns (excluding the current one). During each one of those campaigns, the stock market rallied.
Not a single loser in the bunch.
I expect the stock market to post a strongly positive return between today and the end of the current rate-hike cycle.
To be sure, investing during a deep bear market is a messy, chaotic, and nerve-racking endeavor. But these gut-wrenching moments are the ones that provide outstanding gains… eventually.
1,000% gainers take root in these kinds of markets, even though they might take their sweet time germinating and blossoming.
Eric has been helping his readers plant those seeds, recommending six new stocks to his subscribers in the last five months.
I know he has one recommendation in the new issue coming out tomorrow. If you would like immediate access to the new recommendations and all of Eric’s recommended stocks, click here to learn how to join Investment Report and you will be notified as soon as the issue is released.
Eric may not yet be the legendary humorist and author Mark Twain was – though he is funny and a great writer. Then again, Mark Twain was never the investor Eric is. Still, I think Mr. Twain would be pretty confident that the market cycle will play out again in the coming year. As he said…
It is not worthwhile to try to keep history from repeating itself, for man’s character will always make the preventing of the repetitions impossible.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.