With the new year just around the corner, investors are already sifting through countless predictions and outlooks for 2015. Most are based on knowledgeable, educated opinions which investors would do well to consider when planning their investment strategies.
But we also have other outlooks to consider which are based on trends and patterns from history backed by decades of data. Let’s review just three of the more reliable patterns from the past that point to 2015 as a very prosperous year to remember.
The Presidential Cycle
According to the Stock Trader’s Almanac, “investors should feel somewhat more secure going into 2015”. Why is that? Because “there hasn’t been a down year in the third year of a presidential term since wartorn 1939”.
There is something very reasonable backing the “presidential cycle” pattern. Generally, when a new administration is elected to office, the economy can see a great deal of changes in the first year or two of the new government, especially if the election caused a switch from one party to the other. As the Almanac found, “most bear markets take place in the first or second years after elections”.
New mandates trigger new policies which institute new laws, sometimes turning markets on their heads as sectors that did well under the previous administration are seen doing poorly under the new one, and vice-versa for the remaining sectors.
But after a couple of years of the tide changing direction, by the third year of the four year presidential term, markets have grown accustomed to current policies in general, and can suddenly kick into high gear. Moreover, as the following election nears, “each administration usually does everything in its power to juice up the economy so that voters are in a positive mood at election time,” the Almanac explains the kick at the end of the cycle.
Just take a look at the S&P 500’s track record during the third year of the presidential cycle: +19.4% (1943), flat (1947), +16.5% (1951), +26.4% (1955), +8.5% (1959), +18.9% (1963), +20.1% (1967), +10.8% (1971), +31.5% (1975), +12.3% (1979), +17.3% (1983), +2.0% (1987), +26.3% (1991), +34.1% (1995), +19.5% (1999), +26.4% (2003), +3.5% (2007), and flat (2011).
An investor who was in the S&P during the third year of the presidential cycle would have averaged gains of 16.31% per year. Applying that average change to the S&P 500 today would take the index to 2,430 by the end of 2015, the Dow to 20,980, and the NASDAQ to 5,591.
From Midterm Low to Pre-Election High
Another politically related market cycle is the short one-year run from the midterm election low to the following year’s high.
As mentioned above, bear markets have usually begun in the first or second years of a presidential term. By the time the midterm elections roll around at the end of the second presidential year, equity markets are either at their low point of the bear (if they were in a bear), or have recently experienced a sharp sell off (which we experienced in September/October, and again to a lesser degree this December).
But since the year following the midterm elections is the very strong third presidential year, markets can experience huge swings from the low of the midterm election year (year two) to the high of the pre-election year (year three).
As the Almanac discovered, “Since 1914, the Dow has gained 48.6% on average from its midterm election year low to its subsequent high in the following pre-election year.”
In fact, of the 25 midterm elections from 1915 to 2011, the lowest gain the Dow enjoyed was +14.5%, while the highest was +89.6% from the midterm year’s low to the pre-election year’s high.
Applying the 48.6% average to 2014’s low of 1,740 on the S&P would take the index to 2,585 as the 2015 high, very plausible given the previous calculation’s expectation for the index to finish the year near 2,430.
What would the other two indices’ highs be according to this statistic? The Dow would reach 22,884 and the NASDAQ would reach 5,870 as their potential highs for 2015.
Fifth Year of Decades
If those patterns aren’t enough to cause you to beef up your equity holdings, then let’s add a third: the most productive year of all has repeatedly been the fifth year of the decade, which 2015 is.
“Fifth years have by far and away the best record,” stresses the Almanac, “averaging 28.3% for the Dow and its predecessors in the past 130 years.” In fact, “there has been only one losing ‘5’ year in 13 decades.”
Three Crosshairs All Lined Up
Put them all together – the third year of the four year presidential cycle, the boost from the midterm year low to the pre-election year high, and the fifth year of the decade – and we get three glowing buy signals all converging on 2015. If history works its magic once again, next year should be a fantastic opportunity for investors.
But some may question whether that will be so, given that 2015 may also deliver the first interest rate hike in over 6 years. Won’t that toss a huge wrench into the gears of historical market patterns?
Not necessarily. The Federal Reserve has repeatedly stressed that it will not raise rates until the economy can support them. And even then, the hikes will certainly be small and spread out at first. The Fed’s indicating that “it can be patient in beginning to normalize the stance of monetary policy” is certainly a telling sign of their cautious approach even when the time comes to start raising rates.
If Santa didn’t bring you everything you wanted for the holidays this year, cheer up. Remain invested in equities in 2015 and the markets will be sure to oblige you all year long.
Joseph Cafariello
