Markets are Flying at High Altitude
Markets are flying at high altitude and there is a reason we know this: our investment strategies that depend on finding good undervalued individual stocks are fishing in a nearly empty pond. Given a natural human fear of heights, one might think that this high altitude suggests markets are setting up for an impending disaster. However, just as planes can fly high for an extended time, so too can markets.
All markets ultimately regress to the mean. We are not predicting short-term market direction, but we know that there have been better times to buy undervalued securities.
Why Markets Are Up This Year
"Sometimes" Politicians Actually Help
Every so often, we trot out market facts that seem to defy logic. Take, for instance, the presidential election cycle phenomenon. This is an odd recurring market performance curiosity that has once again been realized this year.
This strange anomaly has occurred fairly consistently through long history. That is - the market has historically
underperformed
in the first half of the four year term of the presidential cycle and
outperformed
in the back half.
So why has this occurred with such regularity? Have you noticed that heavy legislation changes occur in the first half of the presidential cycle - almost always? This is because politicians get the hard things done in the first half of their term and coast in the second half. These legislation changes almost always create some form of wealth redistribution and this risk is a concern to investors that may have something to lose. So, risky legislative years in the first half of the cycle translate into lower returns, while political stalemate and less risky years in the back half of the cycle translate into higher returns.
This year is the third year of the presidential cycle and you can see in the chart below that third and fourth years have been above average - with the highest average returns in the third year: hence well above average returns this year. Does it always work out this way? No! However, over time the averages have held.
