My 2006 Year-End Stock Market Assessment

I am turning bullish on the stock market for the next 6-12 months. In the next two weeks, I will be putting a higher percentage of my personal portfolio in stocks. Here are my reasons for becoming bullish:

Political Reasons

The Democrats have taken control of both houses of Congress from the Republicans. With this change, I expect some positives and no major negatives for the economy in the short term. Since 1945, there have been six instances of a partial or total change of control in Congress. It has happened two times to the Democrats and four times to the Republicans. The average gains in the S&P for November and December during those six times was 4.8%. (See reference)

Next year, 2007, is the third year of Bush’s second term. Statistically, the third year of a presidential term is the best year for the stock market. This is probably due to both parties working to create a favorable economy for the upcoming elections. Since 1945, during the third year of a presidential cycle, stock prices have averaged an 18% gain versus a 9% average for all four years. (See reference)

Economic Reasons

Many businesses are operating lean and will benefit with any positive change in economic factors. Earnings have been growing the past few years in spite of commodity prices increasing. There have been 19 consecutive quarters of earnings growth by the S&P 500. The previous record was 13 consecutive quarters in 1992 -1995, which preceded the bull run in the late 90's. Although economists are predicting slowing growth, I believe that businesses are poised to benefit from some positive news about economic factors.

Inflation remains low and interest rates are no longer rising. Wholesale prices fell 1.6% in October, 2006. Interest rates peaked in July, 2006.

Commodity price changes will be a risk factor. Oil and gold are down from their peaks. Others, such as corn, are near their high. I am anticipating that commodities will be flat or declining for the next few months.

Reference - Standard & Poors Outlook. Vol. 78, Number 12, November 8, 2006

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This is not financial advice. Please consult a professional advisor.

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