interest rate cuts and the stock market

We all know that the Fed has reached the end of its hiking cycle and now has interest rate cuts in sight. From a historical perspective, the start of the easing process has been bullish. Going all the way back to 1921 and spanning 24 periods, the DJIA advanced an average of 15% a year following the first cut.

The narrative surrounding interest rate cuts becomes even better when we factor in whether or not the economy was in a recession. When the Fed has avoided recession, stocks have ripped higher, up 24% on average a year later.

In addition, the Fed has made it clear that it plans to cut rates slowly. The S&P 500 widely outperforms in the 1st year of slow easing cycles versus fast ones. Why is that the case? Because in fast easing cycles, it usually means something has gone wrong (such as the start of easing cycles in 2001 and 2007). But in this case, with the economy on sound footing, a slow easing cycle should bode well for stock returns.

Regardless of what you've heard in the financial media, interest rate cuts don't have to doom stocks, particularly when there is no recession and a slow easing cycle.

Election And Seasonal Cycle Stats Point to More Strength Ahead

We're in the 4th year of President Biden's term. Another reason to be bullish is the fact that election years tend to see enhanced gains when we have a new President that's still in his first term. Dating back to 1950, the S&P 500 gains an average of 12.2% under new Presidents, far above the typical election year return of 7.3%.

-- Weekend Wisdom, 3/23/24

Presidential Election Cycle

The stock market has historically performed better in the third year of a presidential cycle. The theory behind this is that politics and its effect on economic policies can cause the stock market to perform better. Investors expect better business conditions, corporate bottom lines and stock prices in the year before a presidential election.

On this page, we study the effect of the presidential cycle and political parties and their effects on stock market performances. The data is from 1928 to 2023, and updated daily.

As shown in the table below, the market indeed performs the best during the third presidential year of a four-year term. The average gain of the third presidential year is 13.96%. The second best year is the fourth presidential year, with an average gain of 7.38% . The worst year is the second presidential year, with an average gain of just 3.33%. On average, the market has gained 7.82% a year since 1928.

Average annual gains in different presidential years and political parties (%) since 1928

         Democrat Republican    Average

Year 1  12.89%   -0.76%    6.63%

Year 2   3.70%    2.89%    3.33%

Year 3  15.42%   12.23%   13.96%

Year 4   9.39%    5.21%    7.38%

Average  10.35%    4.90%    7.82%

The table also shows a much higher average gain when a Democrat is in the White House. On average, a Democratic president sees an average annual return of 10.35%, while a Republican president just sees an average gain of 4.90%. The third year of a Democratic president would see the highest gains, with the annual average of 15.42%. Among the different combinations of political parties and presidential years, the third years with Democratic presidents see the best returns, followed by the third years with a Republican president. The worst years are the first years with a Republican president.

Out of the last 97 years, there were 65 positive years, or 67%. These are the percentages of the years that have seen positive returns. Again the third years stand out with more positive returns. A first year with a Republican president did the worst.

The Seven Virtues of Great Investors

I started reading Morgan Housel's Psychology of Money because it was recommended by my Kindle.  I can give no higher recommendation than that I am continuing to read it.  I borrowed it on Libby, but it's one of those books that I would actually buy!

Anyway, on the cover is a blurb by Jason Zweig, "one of the best and most original finance books in years".

Zweig is a columnist for the Wall Street Journal and I googled him.  Turns out he has a blog and one of the blog entries is The Seven Virtues of Great Investors.  I'm reading it and it sounds OK to me (but it's not as interesting as Housel's book).

All Hail Munger

Warren Buffett’s great friend and business partner Charlie Munger recently died a little short of his 100th birthday. Buffett has said that Munger made him a better investor — via advice such as: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.” Here are more nuggets credited to Munger:

• On investing: “The world is full of foolish gamblers, and they will not do as well as the patient investor.” And: “Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.”

• On risk: “When any guy offers you a chance to earn lots of money without risk, don’t listen to the rest of his sentence. Follow this, and you’ll save yourself a lot of misery.”

• On succeeding in life: “It’s so simple. You spend less than you earn. Invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life. … And do a lot of deferred gratification because you prefer life that way. And if you do all those things you are almost certain to succeed. And if you don’t, you’re gonna need a lot of luck.”

• On learning: “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

• On thinking: “We all are learning, modifying or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”

Search for “Charlie Munger” online, and you’ll find much more Munger wisdom that might make you a better investor — or person.

-- Star Advertiser, 1/1/24