Betting on the Relationship Between Stocks and Political Cycles

So far, the month of September has proven the pundits wrong. After an awful August -- when the S&P 500 fell 4.7% as fears mounted about deflation and a double dip -- a lot of stock-market gurus bet that this month would also be a bad one for investors.

History certainly appeared to provide plenty of reasons for worry: The S&P 500 had posted its worst monthly return in September whether you went back to 1990, 1970, 1945, or 1928. September hasn't proven so spooky, however. In fact, it's just the opposite: Month-to-date, citing ETFs as indicators, the SPDR S&P 500 ETF

-- which includes holdings like Exxon Mobil

, Apple

, Microsoft

, IBM

, and Bank of America

-- is now up 8% as better-than-expected economic data have dampened fears about a relapse into recession.

Of course, as Jon Markman of Markman Capital Insight reminds us, the second half of September is the part that's given the month its bad reputation. Bulls can't kick their heels with abandon just yet, he argues. But one reason some bulls do cite for their continued enthusiasm is this: The historical record would suggest that the stock market is likely to do very well over the rest of this year and even better next year.

Specifically, strategists that zero in on the relationship between stocks and political cycles bet that stock prices could blaze a path higher. According to Deutsche Bank chief US equities strategist Binky Chadha, the S&P 500 has produced gains in 18 out of the last 19 midterm election cycles. The S&P has returned an average of 13% in the six months after midterm elections, and 17% over the next 12 months.