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2016 Outlook

Unfortunately, our outlook for 2016 is less than sanguine. There is a low probability for substantial gains in 2016. Election years have been considerably weaker in recent history and eighth years of presidential terms represent the worst of election years since 1920.

Currently, the best three quarters of the 4-year cycle (midterm Q4 and pre-election Q1–2) and usual 50% move from the midterm low to the pre-election year high are well below average.

After a sideways move through Q3 2015, we should end 2015 near a slightly higher new high. The next bear market may begin near the end of 2015 or in 2016 and take the market 20–30% lower into 2017–2018 in last cyclical, garden-variety bear market that finally puts an end to this secular that began in early 2000.

We do not expect much upside over the next few years in the market. But after the next bear market, our Super Boom forecast should kick in. We have raised the floor on our initial forecast, but the 500+% move to Dow 38820 by 2025 is still on target.

Election-Year Markets

Only two loses in the last seven months of election years. Regardless which Party is victorious, the last seven months have seen gains on the S&P in 14 of the 16 presidential election years since 1950.

First Five Months better when Party retains White House. Since 1901 there have been 28 presidential elections. When the Party in power retained the White House 17 times, the Dow was up 1.5% on average for the first five months, compared to a 4.6% loss the 11 times the Party was ousted. Since 1950, retaining the White House 8 times brought an average gain of 1.9% compared to –0.1% the other 8 times.

War can be a major factor in presidential races. Democrats used to lose the White House on foreign shores. Republicans, on the other hand, lost it here at home. Homeland issues dominated elections the last three decades. As we’ve learned over the years, it all depends on who the candidates are in 2016.

Market bottoms two years after a presidential election. A takeover of the White House by the opposing party in the past 50 years has resulted in a bottom within two years, except 1994, a flat year. When incumbent parties retained power stocks often bottomed within two years as well, except 1984 (three years, 1987), 2004 (one year, flat 2005), and 2012 (no bottom, QE). Whatever the outcome in 2016, we could see a bottom by 2018.

Only six election year declines greater than 5% since 1896.  Presidential election years are the second best performing year of the four-year cycle, producing loss of greater than 5% in only six of those 30 years. Incumbent parties lost power in five of those years.