The bear case
There is also the Presidential cycle as this article puts it nicely.
Sitting in a spacious office overlooking his firm's large trading floor, Ralph Acampora is worried. The head of research at Knight Capital Group says he's been having sleepless nights fretting about the stock market, despite its New Year's bounce. There's a long list of things that concern him -- mainly abstract concepts such as price patterns, trading volume, and seasonal trends -- that together make for a particularly gloomy forecast: Acampora is predicting the Dow will drop by as much as 20%, or as low as 8,400, this year. "At some point in 2006, we'll have a decline," he insists.
What has the chart readers so spooked is the "presidential cycle"--the theory that the market goes through regular ups and downs over the course of a President's term. This year is the second year of President Bush's second term, and second years tend to be rough for stocks. Since 1970, the second year of Nixon's first term, the market has turned down every four years, with the exception of 1986 (the drop came a year late in the '87 crash). In addition, some of the worst bear markets in recent memory--1962, 1974, and 2002--have hit during year two of the presidential term.
What's going on? The theory runs something like this: During the "honeymoon phase" of his first year, the President uses much of his political capital to push through legislation. By the end of year one, the new programs become less popular, the President's influence slips, and his poll ratings start to decline. Sensing weakness, the opposition party gets increasingly vocal as midterm elections in November approach. Consumer confidence wanes, the economy cools, and stocks tumble in anticipation of slowing profit growth. So far, Acampora says, this year is following the usual pattern, with President Bush under fire for the new prescription-drug plan and warrantless wiretapping, among other things.
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