Happy New Year!

2006 was a great year for us at Trade Your Way To Wealth. The stock market performed magnificently, even with the May – August swoon. Just look at the Dow at an all-time high! But we are even more optimistic about the stock market in 2007.

Here's why…

It's because “ Old Faithful ” is predicting 2007 will be a bullish year.

So who or what is “ Old Faithful ”? This quote from Yale Hearst of The Almanac Investor tells it all:

“The four-year Presidential Election / Stock Market Cycle is the ‘ Old Faithful ' of indicators for us.”

Looking back into history at the last 43 presidential administrations – starting with Andrew Jackson's first administration in 1883 – the stock market has outperformed in the second two years of the four-year cycle over the first two years by a factor of 2 -1. Even better, the 12 months leading up to the election year is known as “The Pre-Election Stock Rally” since stocks tend to perform the best during that period of time. And 2007 just happens to be that year.

Various reasons have been suggested for why this phenomenon exists decade after decade. But the main reason usually revolves around the fact that most administrations go ahead and get their most unpopular or painful decisions out of the way in their first two years in office. These decisions may include fighting inflation, cutting back on wasteful spending, and even starting wars.

However, the second half of each presidential term is a totally different story. Presidents usually want to be re-elected, so they will do everything in their power to “prime the pump”, making as many people as possible feel good, prosperous, and willing the keep the “status quo” going for another four years.

But it gets even better for 2007…

Again, based on stock market history, the market has performed much better with a divided government – i.e. a Democratic President and a Republican Congress or vice-versa. In fact, the best political environment for the market has been a Democratic President and a Republican Congress combination. Just witness the 1994-2001 market for a recent great example.

While we won't have that exact combination over the next two years, we'll have close to the second best situation – a Republican President and a Democratic Congress.

Why does the market like a divided government? Again, several reasons are given, but the most logical is that sharing power keeps the government from passing “radical” legislation. Some more cynical people claim that a divided government promotes “gridlock” – where nothing gets done – and the market likes that kind of stability.

Bottom line, I expect 2007 to be a bullish year for the stock market overall.