I like to go with what works in the markets.
I like to go with historical proof rather than opinions.
More often than not, the simpler the indicator and the more history you can base it on, the better.
In short, it shows that stocks have not had a losing year during the third year of a presidential term. And that year is not far off...
When I first heard of this indicator, I thought it sounded a bit ridiculous...
Investing based on the presidential election cycle? Surely this couldn't be useful.
If Grantham wasn't so enthusiastic about it, I probably wouldn't have given it a chance.
But then I crunched the numbers myself... and the results were shocking...
Using Grantham's way of doing it, with the data going back to 1932, it turns out the Election Cycle Indicator is extremely accurate... Take a look:
% of losing years
* Not including dividends
The numbers in this table are just crazy...
Almost all the gains in the stock market come during year three of the election cycle.
While years one and two are both losers, year three averages a 26.2% return! Year four simply makes up for the losses of years one and two, plus a little bit. (The data doesn't include dividends.)
Yes, year three's gains are amazing. But its "win rate" is even better...
Year three has had only one losing year since 1932 – and that was a loss of 1%. That losing year would actually be a winning year if you counted dividends. So with dividends, year three has had a perfect track record since 1932.
It's hard to believe, I know. But it's also hard to argue with 80-plus years of success.
I tell you this because, according to Grantham's math, the magic "Year Three" is closer than you think...
You see, in Grantham's version of the indicator, you start your "years" at the end of the third quarter (instead of at the end of the calendar year).
That means we're only a few months away from the best time, historically, to own stocks... Grantham's Year Three starts on October 1.
Grantham crunched even more numbers on this indicator... and he found something even more interesting...
He found that, particularly in the past 50 years, nearly all of the returns in his Year Three came in the first seven months... from October 1 through the end of April.
(Astoundingly, Grantham also found that the U.S. election cycle has similar results in Japan and Europe. When OUR election cycle is in Year Three, those foreign markets go up... a lot.)
Long story short, Grantham's Election Cycle Indicator is about to kick in. This Indicator has been flawless since 1932 for Year Three profits when you include dividends. And according to Grantham, the majority of the profits happen in the first seven months.
So you really want to be invested in stocks from October 2014 through April 2015.
One important caveat here – there haven't been that many Year Threes in Grantham's study (mathematically, we've had 12 of them in the last 50 years). So Grantham says "it may well be pure luck." He is right... but you have to admit, that is a long stretch of luck!
In his most recent write-up on this topic, Grantham lays out a possible path for the stock market:
After October 1, the market is likely to be strong, especially through April, and by then or in the following 18 months up to the next election... [it] will have rallied past 2,250, perhaps by a decent margin.
And then around the election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up.
Wow, those are strong words...
You can read Grantham's full report, "Looking for Bubbles and In Defense of Risk Aversion," at www.gmo.com
. (You'll find it under "Quarterly Letters.")
Check it out...
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It does not represent the opinion of Benzinga and has not been edited.