By Keith Fitz-Gerald
Money Morning/The Money Map Report
With the whipsaw trading we've seen of late, it appears that the U.S. financial markets are already chewing through the post-election honeymoon. I have to say that I, for one, am relieved that's the case because it signals that the markets are already returning to normal.
I realize it may not feel that way, but there's one very important thing to remember: We nearly always seem to receive the best news near, or at, market tops, and the worst news near, or at, market bottoms. Although that seems contradictory, it actually makes sense. And investors can take some solace in the fact that the mounting tide of bad news is an important part of the bottoming process.
Speaking of which, studies show that the most dangerous time for American markets (and U.S.-centric investors) is when one political party controls all the marbles. It doesn't matter which one, either – Republican or Democrat. The reason is clear: Single-party control typically brings out the very worst in big government in the form of higher taxes, magnified spending, and even war. As my friend, economist Mark Skousen, recently noted, "every one of the major wars involving America occurred during one party rule: World War I, World War II, Korea, Vietnam and Iraq."
According to studies conducted by researchers at Ned Davis Research, the best thing financially would be to have a divided government and gridlock. In short, the Dow Jones Industrial Average Index logs its biggest net gains with a donkey in the White House and elephants traversing the halls of the U.S. Capitol Building. During such periods – with a Democrat in the White House and a Republican Congress – the stock market generates an average return of 9.6% a year.
People assume that a presidential administration and Congress with matching political affiliations is the best way to get things done, but in reality, the checks and balances of a mismatched pair helps to ensure that governmental agendas don't go to extremes. Thus, somewhat surprisingly, political gridlock is actually a reality that puts investors at ease and permits the financial markets to operate efficiently.
Obviously, with Democratic President-elect Barack Obama coming into office in the New Year, along with an even stronger Democratic Congress, we're not going to have such gridlock-generated returns to look forward to.
But fret not: Another interesting conclusion suggested by our own research, and that of Ned Davis and other research firms, is actually quite promising. In stark contrast to what most investors believe to be true – that Republicans are better for the markets – the fact is that the blue-chip-dominated Dow tends to rise nearly twice as fast during Democratic presidencies (7.2%) as it does during Republican ones (3.8%).
The great equalizer, if there is one, appears to be inflation, which rapidly eats away the higher returns to bring them within a few basis points of each other over time.
And with the U.S. government having injected roughly $3 trillion in bailout money into the financial markets, an inflationary environment may well be in our future.
Rest assured, we'll continue to monitor the markets and keep you informed of all the latest developments. In fact, if you haven't already, tune in on our just-started "Money Morning Outlook 2009" global investing forecasting series.
Our "Outlook 2008" series was so well received that we ultimately published it as an investment playbook. This year, our series is even more comprehensive. We've already published our forecasts for the Obama Administration and how its policies may affect the U.S. market, for the U.S. economy and for the stock market. And we're planning individual reports on gold, oil, housing, Latin America, China, retail sales, biotechnology, alternative energy, income investments – and more. Stay tuned to Money Morning.
News and Related Story Links:
- Money Morning Market Commentary:
When Gridlock is Good: Why a Contentious Election and Legislative Bottlenecks Pack a Profit Punch for Investors.
- Money Morning 2009 Economic Outlook Series (Part I):
Money Morning Outlook 2009: Obamanomics Offers Investors Plenty of Profit Plays in the New Year.
- Money Morning 2009 Economic Outlook Series (Part II):
For the U.S. Economy in the New Year, the Pain Will Precede the Promise.
- Money Morning 2009 Economic Outlook Series (Part III):
Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.