This is the first of 4 charts I plan on revealing this week. Each one will hopefully shed some insight into what we may expect in 2006.
This chart shows what is known as the 4 year or Presidential Cycle. The theory behind this is that U.S. markets have a tendency to make a high in the 4 year, and a low in the 2nd year of a president’s term. It has held up quite well historically, with the notable omission of 1986 (Recall, however, what happened in 1987).
click for larger graphic
The chart suggests that a cyclicality is at play in direct contradiction to the random walk thesis. Given the upward bias of markets over time, regular corrections may be inevitable. What is truly astonishing is the very human tendency to downplay or even ignore these periodic dislocations.
This is not unlike yesterday’s discussion of earthquakes, volcanoes and tsunamis.
I pulled this from my files, but unfortunately, I cannot find a source.
It looks similar to work by Investech’s Jim Stack; I emailed them to confirm this. If anyone has any insight into where this may have come from, please let me know . . .
UPDATE 1: December 27, 2005 11:03am
William Hester has several excellent charts on the subject here:
Average Gain in Year Two of Presidential Cycle Hides Important Declines
UPDATE 2: December 27, 2005 5:03pm
click for larger chart
and, it looks better in red!