Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Sunday, September 26, 2010

Will the Market Rally Following the Election?

We wrote back in July in a blog titled “Don’t Miss the Party” that a substantial amount of cash was on the sidelines waiting for the right moment to invest. We wrote:

“An article in the July 12 –July 18, 2010 issue of Bloomberg Businessweek titled When Cash Takes a Vacation by Roben Farzad, reported that ‘American Households are sitting on nearly $8 trillion in cash – money that’s earning virtually no return because people are so wary of additional losses.’ The article also reports that non-financial U.S. corporations had $1.4 trillion of cash on hand in the 1st quarter of this year. That was a 27% increase over 2007. At some point, the low returns this cash is receiving will motivate corporations and individuals to deploy it elsewhere.”

In our blog, we noted that being out of the market when a big rally takes place can be detrimental to your financial future.

In our opinion, the current problem with the economy seems to be more a problem of uncertainty and lack of confidence than anything else. Businessmen, bankers and investors are afraid to invest because they are uncertain about taxes, new regulations and the new healthcare plan. Banks are afraid to lend and businessmen are afraid to borrow. Providing them more money to invest doesn’t seem to be the answer. They need a reason to feel confident. A considerable number of people are unhappy with their government.

It seems probable that a substantial number of incumbents will find themselves without a job following the upcoming election. It may be that a significant change in Washington across both parties could spark a market rally.

An article in this weekend’s Wall Street Journal titled “Will Post-Election Bounce Happen This Year?” by Ben Levisohn, notes that historically markets rally after mid-term elections. The article quotes an average gain of 17.1% in the Dow Jones Industrial Average following mid-term elections.

The article explains that sitting presidents typically try to stimulate the economy in their third year in an effort to help their prospects of re-election. In many cases, the article says, the Federal Reserve has often lowered interest rates in the third year by an average 0.3%. With interest rates currently so low and all the controversy about the administration’s stimulus plans to date, it seems unlikely that the administration can utilize those tools. Therefore, the article states, a post-election bounce may not happen this time around.

Yet, for the reasons noted above, we believe the election may give confidence to bankers and investors alike, that the issues they are concerned about may soon be resolved. This could result in a market rally. The Journal article states that some believe the recent run-up in the market is in fact due to anticipation of a Republican takeover of the House of Representatives. Whether or not a rally occurs following the November elections remains to be seen. Timing the market is tough. We don’t recommend placing a big bet on such a speculative outcome. Never the less, it’s interesting to think about.


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