Alpha Power Investing Newsletter

November 14, 2014

The Sweet Spot

We have now entered the "sweet spot" of the four-year Presidential Election Cycle. This five-quarter period, which begins with the fourth quarter of the mid-term election year, has historically produced the lion's share of stock market returns over the four-year cycle. Moreover, this five-quarter period has produced positive total returns (S&P 500 appreciation + dividends) for every election cycle since 1931.

The chart below summarizes this robust period from 1949:

Based on historical data, the next 15 months (beginning October 1, 2014) should result in a significant gain in the market. Yet this period will unfold over one of the most overvalued markets in modern times. Currently, the S&P 500 is valued at 26.7x trailing ten-year real earnings (Shiller PE), a level exceeded only by 1929's peak and the peak of 1999. That puts today's stock market in the top 10% of valuations since 1900. At these levels, investors should not expect robust long-term returns. In fact, based on historical experience, investors should be bracing for a long (7-10 years), volatile haul with practically no significant cumulative gains.

Our disciplines are based on statistical regularities which have long histories. Like the election cycle "sweet spot", they are based on the way investors react to recurring structural patterns. Some of these patterns are global, like the propensity of stocks to out-perform from late-October to late-May. Others are local, like the effect of the election cycle on the market. These patterns are not written in stone, but they are reliable over the long term. Therefore, we will trust to our seasonal strategies to take us safely through what could be a lengthy, disappointing period in the market.

Sincerely yours,

Jerry Minton, Ph.D.
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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