International investments are greatly affected in the short term by US politics. Investments in the US affect the US dollar and the has an impact on international investments.
An alert reader helped clarify my puzzlement about international investments with an article on how politics is affecting Wall Street investments now. He wrote:
You may be interested in an international investments article that appeared in the December 2006, issue of Stocks & Commodities entitled “Midterm Miracles” (Pg. 26). The point of the article was that the period from the midyear election to the Presidential election (two years) produced the most dramatic market returns of the Presidential cycle. In other words, buy the midterm elections and sell the Presidential. This, according to the article, has produced the most dramatic returns of the Presidential cycle.
The author states that after a day’s worth of data mining, “I realized that since 1950, this pattern has held through bull and bear markets: the market (as measured by the Dow Jones Industrials) was always higher in the Presidential election that it was at the midterm elections two years previously.
“The best return was . . . from 1994 to 1996, with a 75% return on the Dow Jones Industrial Average (DJIA). The worst was 8% from 1958 to 1960. The average return was 39%, and the median was 25%. The most recent cycle was 2002-04, saw an 18% return on the DIA.”
The author also relates that he also went as far back as the data provided by Prophet Financial Systems could take him. During the first half of the 20th century, through the Great Depression and the World Wars. From the 1946-48 cycle to the 2002-04 cycle, the average and median returns were less impressive — 19.7% and 13.5%, respectively. But the underlying theme for speculators of “Buy the midterm and sell the Presidential” remained a compelling one.
The author also summarizes what other authors have written on this two year cycle. For example, Marshall Nickels, professor of economics at Pepperdine University notes in an essay for the Graziadio Business Report that:
(A)dministrations have often yielded to the temptation to exercise fiscal policy in a manner designed to pump up the economy just prior to the presidential election and thus garner voter approval for the incumbent party. This action does not come without a cost as Professor Nickels goes on to write that:
(S)trong doses of fiscal and/or monetary policy stimuli unfortunately often result in creating inflation, which then must be addressed, thereby perpetuating the business and stock market cycles. Given the foregoing scenario, it is not at all surprising to find that the market often has made major bottoms about two years before presidential elections.
According to the author of the article in Stocks & Commodities, Nickels' data, which spans the period from 1942-44 cycle to the 2001-2004 cycle, actually pinpoints an average of 1.97 years into the Presidential term when the market (here the Standard & Poor's 500) bottomed. That works out to mid-October of the second year of the Presidential term (the inaugural year being year 1).
We have now seen with the help of this reader two reasons why the US equity markets are now strong when history suggests they should be weak. On reason is excess liquidity created by the Federal Reserve Bank. See at garyscott.com/international_investments/international_investments_151.html
The other is political interference by the current administration to buck up the economy for the upcoming Presidential election.
The result of both these interferences is increased inflation! The long term result of increased inflation is usually (unless every other nation has equal or more inflation) a loss of value versus other currencies.
You can read the rest of today’s message on why “Ecuador Real Estate is Inexpensive” with pictures at garyascott.com/international_investments/international_investments_156.html
Until next message may your international investments be good.
P.S. Join us in the Ecuador sun this winter. Here is a schedule of the courses Merri and I will sponsor and or conduct.
Jan. 22 – 26, Mon.- Fri. Self-Fulfilled: How to Be a Writer & Publisher. garyascott.com/catalog/pc/
Feb. 20 – 25, Tues.-Sun. Import-Export Course. garyascott.com/catalog/impex/
Mar. 9 – 15, Fri.-Thurs. Expanded Super Thinking + Spanish. garyascott.com/catalog/sp7/
Mar. 16 -18, Fri.-Sun. International Business and Investing Made EZ. garyascott.com/catalog/IBEZec/
Mar. 19 – 21, Mon.-Wed. Andes Extension & Real Estate Tour. garyascott.com/catalog/andeanext/