What Historical Trends Say
Jeffrey A. Hirsch and J. Taylor Brown observe in the “Stock Trader’s Almanac 2010” that 2010 has two factors on the proverbial wall of worry: midterm elections will be held in November and the fact that it is a “zero” year.
Midterm election years tend to be the third worst in the four-year election cycle. Often, crises and dissatisfaction with the incumbent party have coincided with market drops.
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Years ending in a zero have also not been kind to investors. The Dow has declined during eight out of the last 12 years that ended with a zero. The blue-chip average did, however, post gains in 1950, 1970 and 1980.
Though historical trends make for interesting conversation, there is nothing particularly unique about a midterm election year or a year that ends in zero. Rather, it is the factors impacting investor sentiment, corporate earnings and economic growth that determine whether stocks will rise or fall. It just so happens that crises have tended to occur during the first two years of a presidential term. (This is due to a combination of factors, including a “testing” of the new president and events that originated under the former president’s term.)
In terms of 2010, Hirsch told AAII that he expects the midterm elections to have a more profound effect than the “zero” year phenomenon. In particular, he notes the potential for increased attacks by the Republican Party in an effort to regain Congressional seats. Such attacks could, in turn, hurt sentiment toward current economic policies. On a brighter note, Hirsch does note that midterm election-year market pullbacks are typically followed by significant rallies. These rallies are aided by economic and fiscal policies intended to help the incumbent get reelected.
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