Another leg up is all the more likely now, because
we’re heading into what history tells us is an
extraordinarily strong period for stocks. Take a glance
at the chart on this page.
As you can see, the S&P 500 during the fourth
quarter of midterm election years has produced
double the average gain of all fourth quarters since
1950, and quadruple the gain of all quarters (first,
second, third and fourth). What’s more, 88% of all
fourth quarters in midterm election years since 1950
have ended in the green. Do you really want to pitch
against a batter with an average like that?
Interestingly enough, the only two midterm fourth
quarters to post a loss since 1950, according to the
folks at LPL Financial who compiled the numbers,
were 1978 and 1994. In both years, the Fed was
aggressively jacking up interest rates. Is the Hobbit
Lady doing that now?
Hardly. Dr. Yellen and her comrades are taking
pains (promising zero rates for a “considerable time”)
to exclude any such possibility. So, despite the already
elevated valuations of many big-name stocks, the path
of least resistance is still up. If anything, the magnitude
of the rally may even catch most of Wall Street’s bulls
by surprise. A blowoff approaching 2200 on the S&P
isn’t out of the question.
You might expect me to be whooping it up over
this prospect. However, my enthusiasm is actually
quite restrained. Today’s market is rife with not
only overvaluation but also excessive speculation,
as evidenced by record margin debt and frenzied
mergers-and-acquisitions activity. Polls reveal a high
degree of complacency among most market players.
Such conditions can fuel a breathtaking, parabolic,
“I can’t afford to be left out” rally. Alas, though:
Blowoff rallies tend to burn out quickly and to
collapse suddenly, as in 1929 and 1987.
-- Profitable Investing, October 2014