Dow 16,000 By December '07? The Election Cycle Might Support It

Includes: DIA, DVY, QQQ, SPY
by: Russell Bailyn

An article in Registered Rep magazine in November tells the market forecast of Curtis Teberg, a portfolio manager based out of Minnesota. Teberg puts the Dow at 16,000 by December 31st, 2007, a 33% increase over its value on October 1st. Wow! I’d better start loading up on blue chip stocks. Apparently I’ve already missed out on a 6.2% move in the Dow since October 1st! Or, is this an unfounded and spontaneous move? Check out the basis for this forecast and see how it sits with you.

Teberg shows the 15-month returns of the Dow Jones, S&P 500, and NASDAQ beginning October 1st of pre-presidential election years and ending on December 31st of the following year. The results are commendable. The average return of the Dow Jones over the last 5 of these 15-month pre-presidential cycles is 35.15%. For the S&P 500, 35.44%, and for the NASDAQ 62.65%. The NASDAQ number, while it may seem high, is likely a reflection of a massive return between October 1st of ’98 and December 31st of ’99.

When asked why he suspects the markets rally after midterm elections, this was his response:

“Post-midterm elections are a time when Americans clamor for change. “We think if things are good, they’ll get even better; and, if things are bad, they’ll improve. “The changing of the office and the campaign rhetoric gets people excited about the markets.”

What do you make of this? When going back to 1926, rather than just the past 5 cycles, the results only produced one 15-month cycle (1930-1931) with a negative performance.

I think the theory could hold some legitimacy. We seem to be in one of those political cycles now in which many Americans are expecting change and feeling optimistic about the future. We saw a shift in Congressional power last month and the media is already offering predictions and speculation about the presidential race to come. Combined with the fairly sideways market which has bored investors since the tech bubble, perhaps we are due for this political excitement and the ensuing rally in the major averages.