The debate about whether the stock market faces a big decline or has the potential to move higher continues on a daily basis in the media. With the current bull market over 5 ½ years old, the fourth longest on record without being interrupted by a 20 percent or greater decline, I think that adopting a cautious attitude is the proper thing to do. However, there are some compelling historical trends which support the idea of higher stock prices in 2015.
First, there is the widely followed presidential election cycle theory, which averages the performance of the four years of the election cycle to see which tend to provide good or poor performance. Averaging long-term history in this way shows that years one and two of the four-year cycle tend to be the weakest, and years three and four the strongest for stock returns.
The theory behind this pattern is that the president will work on the harder, unpopular legislation early in his term and the easier and more popular policies as the next election approaches. Whether this is true or not the results over time have been statistically significant.
According to research firm Ibbotson Associates, in 13 completed election cycles since 1960, the average return for the S&P 500 in the fist year of the president’s term was 10.04 percent, the second was 3.13 percent, the third was 20.75 percent and the fourth 10.12 percent. While year one wasn’t too bad, trends show the friendlier time to be a stock investor is the last half of the president’s term. And, that’s right where we are now, with 2015 being the third year and 2016 the fourth.
The discussion above bodes well for potential gains by equities in the next two years, but I would also point out that the second year of Mr. Obama’s term was 2013. In what should have been a poor year, according to the theory, stocks had a really great year, returning in excess of 30 percent. The important point of this is that creating investment strategies around averages and trends which are calculated of 50 years or more leave you susceptible to the times when the trend doesn’t occur on the anticipated track.
Perhaps the most stunning, but probably coincidental trend, is the data around stock returns in years that end in a 5. I’ll refer to this as the lucky number 5 theory. Since 1885, there hasn’t been a year that ends with a 5 in which stocks had a negative return (to be fair, prior to 1885 there were mixed results). The other significant statistic is that the average annual return for all years ending in 5, including the pre-1885 data going back to 1805 is over 18 percent. Since WW II the average is over 23 percent.
So, if the election and lucky number 5 patterns hold true, 2015 could be another good year for stock investors. As cautioned above, we would not bet the farm on any of these theories. While they may have some merit, there is not guarantee history will repeat itself in the same way this time around.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.