The Dow Jones Industrial Average kept shattering historic highs last week, climbing first to 11,727.34 on Tuesday, then to 11,850 Wednesday, but that's nothing compared to what it could do next year, said fund-of-funds manager Curtis Teberg of the Teberg Fund of Duluth, Minn. In fact, it's poised to climb as high as 16,000 by next December, he said.
No, it's not another case of "irrational exuberance," he said.
It's history, stupid, and just as that 1992 Clinton Campaign mantra famously pointed out, it also has to do with the fact economic performance and elections are closely intertwined.
Post-election spikes are especially true for mid-term election seasons, like this one, giving Teberg his prediction for the Dow.
"If you go back to 1982, and look at the 15-month cycle that starts in the fourth quarter of a mid-term election year, the market has done very, very well." In fact, in the 15 months following mid-term elections since 1982, the Dow has gained, on average, 52%, according to Teberg.
"My theory is, it has to do with Americans loving change," he said. "Politicians give us the idea that they can make things better, even when things are good." Declining voter turnout doesn't dampen the mood elections spark, he added.
Teberg's barometer for the Dow's performance in the post-mid-term year takes the average difference between the low point of the mid-term election year-which, thus far in 2006, was the June 13 close at 10,706.14-and the high of the following calendar year. During the last four of six election cycles, that high has hit in December.
And it's not just the old standby 30-stock blue chip index that surges. Although not necessarily to the same degree, Teberg's research shows that both the S&P 500 and the Nasdaq generally also do well. Since 1986, the S&P 500 has had an average gain of 5.05% during that 15-month span, suffering losses only in 1995, and in that case, by only 0.02%.
For its part, the Nasdaq has gained, on average, 20.4% in post-mid-term periods since 1986, with the biggest gain being 140.24% between the 1998 mid-term elections and 1999. The one loss, in the 15-month period following the 1986 mid-terms, was a 5.76% drop.
Strong performance in the third year of a presidential term? Sure, you've heard that one before. And that's the point, Teberg said. "History does have an effect, and it does, in fact, repeat itself," he said.
That's why Teberg's $34 million fund is now 65% in cash, a significant change from the end of the first quarter, when 90% of the fund was in equities. While Teberg is bullish on 2007, he said there very well may be a correction before the end of 2006.
But he's confident that by the end of next year, there will be gains, and he wants his shareholders-among which he is the largest-to profit. So, he's carefully reviewing funds, watching prices, examining their 52-week highs and lows, and looking to get in on deals.
Within the market, Teberg's research indicates, the sectors that do best in the 15 months after mid-term elections are healthcare, financial services, technology-including hardware and software-and communications, such as Internet companies.
Right now, Teberg is assessing between 20 and 25 funds in each of those sectors, and selecting four or five from each, based on their track records for the 15-, 10-, five- and three-year periods.
"I am conservative in my approach, and it takes a lot of due diligence," he said.
The result is a low-volatility fund holding sometimes scores of other funds from across families, styles and loads. Unlike competing funds-of-funds offered by giants such as Vanguard, for example, where all underlying holdings are picked from proprietary line-ups-the Teberg Fund pulls from everywhere; but, there's a price for such freedom, and that is reflected in the fund's 2.25% expense ratio.
Teberg is conscious of, but not bothered by, his higher-than-average rate because he's banking on another theory born out in the history of investing: clients don't mind the fees when their funds deliver higher-than-average returns.
While Teberg sets careful time frames for buying in and out of funds, his method is not necessarily for the do-it-yourself crowd. "We are loathe to advise investors to move in and out of positions," said John Coumarianos, a mutual fund analyst with Chicago-based Morningstar.
"You should have a long-term perspective and come to some determination about allocations-bond, stock and cash-and you should do your best to stick to those allocations, which can be difficult psychologically," Coumarianos said.
"If any one of these things worked every time, rather than just on average, we'd have a lot of rich investors, and much more volatile markets, as everyone tried to play the same game," said Don Cassidy, founder and executive director of the Retirement Investing Institute in Denver. And while statistics suggest 60% of those who set their 401(k) investments never change them after enrollment, those who do get active often fall victim to their emotions, buying in and selling off at exactly the wrong times, Cassidy added.
"People need to learn not to watch every wiggle, because the volatility tends to push the wrong buttons," he said.
But as a seasoned professional, Teberg, 58, said he plays by the rules, and if the rules say sell, he does, thereby avoiding the ride down.
That's what he'll be doing in 2008, when his model suggests it will be time to reassess, possibly getting more conservative to avoid losing the gains of 2007, he said. Presidential election years can be decent, although still weaker than the post-mid-term year, and the year after the presidential election is typically weaker still.
"Maybe that's the year we discover our politicians can't give us everything they promised," he said.
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