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Politcal & Economic Cycles: Which To Watch

Posted on February 17, 2016

Politcal & Economic Cycles: Which To Watch

Posted on February 17, 2016

Given the cyclical nature of the stock market and the four year political cycle it made me ask the question:

What cycles do I need to be aware of in light of the global markets and presidential election coming up at the end of 2016?

Before answering this question let's start from the basic building blocks of understanding how economic cycles are influenced by the political cycle.

First, the incumbent's job or a candidate's job is to first get elected. The end does justify the means in this case because any candidate will do anything to prime the pump, wanting the market to go higher & get the voters in a good mood to fund their campaigns and vote them into office. Come the first year, the new president usually tries to make changes on their agenda and leave behind the promises they spoke about during their campaign. The stock market usually doesn’t do so well given the first two years are met with recessions or bear markets given how history has unfolded in the last 100 years on the Dow. Some of the bigger bear markets began in 1929, 1937, 1957, 1969, 1973, 1977, 1981 and most recently 2001 and 2000. The last two years are met with more bullish tones as the pre-election year is meant to boost moods.

As you can see the 3rd year, pre-election year is typically the strongest in annual percentage change. But, 2015-2016 was not this way. It was flat.

Now the next graph is most compelling. This was presented to me in my Chartered Market Technician Material.

Observe the study done by The Princeton Economic Institute of the global business cycle. Its cycle hits some memorable years with relative accuracy. Note, it's not meant to be tit-for-tat of the stock market action, but merely a guideline based on macro-economic events.

Notice 2015 to 2016, last year. We didn't have a negative year in the market, it was flat. Thus, not tit-for-tat. Note 2016 to 2017, this year, it's illustrated to reverse to the upside which would correspond with a positive election year as our candidates want to get the US in a better mood before voting occurs. Note, the larger downtrend from 2015’s peak to 2020’s trough. This being a larger trend to keep in mind.

Notice the drop-off following 2017. This may mean that the peak is before, during or after 2017. This would coincide with the political cycle given the newly elected president paying the piper come 2017 into 2018.

Another indication of market turning points is the stock market’s reversal following the “Three-bumps-and-a-Run-Rule.” The Fed raises interest rates three times consecutively within a given year and it takes about a year for the stock market to have a correction of one degree or another. John Murphy’s book, Intermarket Technical Analysis brings this to light:

“In the 12 times that the Fed pursued this policy in the past 70 years, a bear market in stocks followed each time. In the two-year period from 1987 to 1989, the Fed raised the discount rate three times in succession, activating the “three-steps-and-a-stumble-rule” and, in doing so, placed the seven-year bull market in equities in jeopardy.”

On-top of this there’s a few macro-economic and population issues brewing:

Aside from the decreased commodity prices and deflation coming into question…Global debt has increased to $57 Trillion1. We have an aging global population between the three largest global economies of China, Japan and the US. Central banks are out of ammo given the fact that interest rates are at all-time lows across the globe for an unprecedented long-period of time. Note, the housing bubble that led to a credit crunch and global recession was due to very low interest rates for an unprecedented longer-than-normal-period-of-time albeit other factors were involved, I understand.

Millennials have an ‘entitlement’ mentality and thus a higher penchant for socialist ideology, which history proves never helps a capitalist society progress. Moral demise has occurred on more levels than I need to list because anyone with kids reading this understands because they have to protect their children from what they see on the internet, TV, video-games, etc.

What is the summary of data presented?

  • The Princeton Economic Institute’s study of the Business Cycle done in 1997 shows a similar downturn may be on the horizon via 2017-2018.

  • A Fed on path to raise rates which has a lag time of about a year before affecting the stock market via 2017-2018. “Three-bumps-and-a-Run-Rule.”

  • The Post-Election Presidential Cycle would fall into line with 2017-2018 as well.

  • Global Debt is mounting

The evidence is mounting. It’s important to be aware of the larger cycles which allows us better confidence in understanding the economic world at large. I'm convicted that the first post-electoral year of 2017 to 2018 won't be up, it'll be down given the macro-economic & cyclical data presented. Think for yourself and make your own conclusion.

Stay warm,
Jos. G. Sellery