We have the Santa Rally, the October Crashes and now the US election rally.
Generally the year of an US election is a positive year with the bulls out in force. There have only been two exceptions to this rule since 1960. The first was in 2000 and the second is this year, 2008.
Usually the stockmarket rises in an election year because the incumbent Administration spends money to help the next candidate. It’s the Federal Reserve which is responsible for interest rates and money supply in the US and there’s not too much that the US government can do to influence this. The US government can however change taxation and hence spending patterns. In the past this has led to the government to act in such a way that pumps up the economy prior to voting to help the new candidate.
This has led investors to anticipate a good sharemarket returns in the year of the election. In fact, the cycle of the sharemarket often lasts four years, which is one term of the US government. The low of the cycle is most often in year two which is mid-cycle of the US government term.
This year has been different. The US stockmarket measured by the Dow Jones Industrial Average is down 27% so far. It does look like the market has managed to stage a US election rally. The US has seen its largest election day rally in history with the Dow Jones Industrial Average gaining 3.1%.
The big question is why a change of government would be a positive for the US economy and the US sharemarket. Putting aside the negative sentiment associated with the last government, the US election is going to mean a removal of uncertainty for the markets.
The good news is that markets tend to perform well after the election to the end of the year.
The bad news is that the bumpy ride probably isn’t over with more earning downgrades expected to come through and with markets having already factored in a win by Obama.
In fact if we focus on the economy, there isn’t much to celebrate.
Back home in Australia, today the government cut the growth forecasts for Australia in 08/09 down to 2% from a previous forecast of 2.75% with considerable risk that growth may be even slower than that.
Companies with high gearing levels are still stumbling. Allco Finance Group is the latest company to go into administration because of the credit crunch.
Many companies which relied on high levels of debt are now floundering as falling asset prices accelerate problems.
The good news is that Armageddon in the financial markets has been avoided. The price of credit is falling and slowly the credit markets are thawing out.
The bad news is that we’re not out of the woods yet despite the election rally. And it remains yet to be seen whether we will see a Santa rally.
Remember, markets go up, markets go down – it’s a normal part of the economic and market cycle.
Happy investing!
Julia Lee Equities Analyst Bell Direct
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