A Strong Month For Stocks… Here’s What’s Next!
Wow… what a rally!
The S&P 500 and Nasdaq are up a hefty 4% in the last week and a half while the Dow’s risen a respectable 3%. Not too shabby considering many investors were convinced Europe’s problems would kick off a gruesome wave of summer selling.
Well, a funny thing happened…
Europe’s problems didn’t bring financial Armageddon like many thought it would. Instead, investors rejoiced as European politicians finally put aside their differences and came together for the common good of the Euro.
Even though the debt problems will still take time to be resolved, the plan released last week gives investors a road map to a solution. And that’s precisely what investors need to put European uncertainty in the rear-view mirror and keep markets moving higher.
Speaking of moving higher, the S&P 500 has its sights set on the highs established earlier in the year.
Take a look…
As you can see, the S&P 500 turned in a bumpy, yet solid performance amidst all the economic uncertainty last month. But more importantly, last week’s rally raises the odds markets will retest the April highs by year-end.
But it will likely be a bumpy ride…
See the red line on the chart? That’s a resistance trend line from the late April highs. This technical area will likely bring about some selling over the next few weeks. In fact, we could see the S&P 500 drop to the blue support trend line at the 1,300 level by month end.
However, any weakness in July will likely set us up for a late summer rally.
Let me explain…
Many investors are still scared to death of another market meltdown like we saw the past two summers. But if you look at the data, history doesn’t support a swift summer sell-off this year.
You see, this is an election year. And according to our friends at Bespoke Investment Group, the fourth year of a Presidency has a historical trend of strong market performance… especially re-election years.
Of the 16 presidential elections since 1948, 10 involved a sitting President running for re-election, just like Obama is this year. In those 10 re-election years, the S&P 500 averaged a yearly gain of just over 11%.
If the S&P 500 meets that historical trend, it will close around 1,400 by year-end. In this scenario, we would likely see choppy markets through the summer with a rally into November.
That sounds nice, but should you trust the Presidential cycle?
There are plenty of skeptics of the Presidential cycle and its effect on the markets. But as strange as it may sound, there’s a good reason why markets are supported in the critical months ahead of an election.
Quite simply, the administration seeking re-election will do whatever it can in the form of fiscal stimulus to keep markets strong and confidence high. And I don’t expect the Obama team will do any different this time around.
Bottom line…
If you’re scared of a market meltdown this summer- don’t be. Europe is taking the proper steps to slowly solve its troubling debt issues. But more importantly, a looming US Presidential election increases the odds markets will be supported into November.
Until Next Time,
Justin Bennett
Category: Stocks
