Alpha Power Investing Newsletter

September 5, 2014

Getting Back In


We are rapidly approaching an important seasonal marker - the election cycle power zone.

The four-year presidential election cycle exerts a strong influence on the distribution of stock market returns. Specifically, the five-quarter time period beginning with the mid-term elections has been remarkably robust historically, delivering almost all the investment returns of the four-year cycle. In fact, this five-quarter period has not suffered a loss since the 1931 cycle. The chart below details the recent history of the election cycle "power zone".


Our chart uses 50% S&P 500 / 50% NASDAQ 100 because large technology companies like Intel and Microsoft provide oversize returns during the election cycle power zone.

The cause of the bullishness during this period is the fact that the political class turns its attention to the next presidential election. During this period, both parties move to the center and avoid promoting extreme partisan policies. Incumbent politicians redefine themselves as sober, prudent guardians of the public purse, despite their previous profligate spending binges. Time and again, the electorate buys into this game and optimism about the state of the economy rises, helping the cause of the stock market.

The last election cycle power zone was one of the weakest ever - a mere 11.24% total return over five quarters.


I expect the upcoming power zone (October 1, 2014 - December 31, 2015) to be weak as well due to the level of overvaluation currently defining the stock market. Based on historical precedent, the current market is very expensive because of the Fed policy of zero short-term rates, which drives investors from traditional safe havens into the stock market searching for higher yields. As long as the Fed provides this low rate cover for investors, market retreats will be short and well-contained. But the other side of the coin is that significant gains from this point forward are unlikely due to the richness of stock prices domestically and globally.

My own view is that, at some point in the future, an exogenous shock will occur with enough force to shake the foundations of the current Fed policy, forcing interest rates upwards and a dramatic re-valuation of the stock market. In as much as I haven't the foggiest notion of how or when this will happen (if at all), the best policy is to continue to follow our discipline, which is based on well-defined seasonal cycles.

Most Alpha strategies will re-enter the market in late-October. The fourth quarter of the mid-term year has historically been the most powerful in the four-year presidential election cycle, averaging just over 7% from 1931 - 2009. Our four-year cycle strategy, The FormulaTM, will re-enter on October 1, and will hold a 100% exposure to equities for the next 20 months.

To see the historical results of The FormulaTM strategy, go to the Strategies and Performance section of our website at www.alphaim.net section of our website.

Sincerely yours,

Jerry Minton, Ph.D.
President
1-877-229-9400, Ext. 11

Disclosure: Past performance is not a guarantee of future performance.

 
© 2014 Alpha Investment Management, Inc.
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