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Another reason for staying bullish on stocks

If the "Presidential Cycle" effect holds, 2011 will not be a down year for stocks.

U.S. President Barack Obama (Photo: Saul Loeb/Getty)

The “Presidential Cycle” effect may be another reason to stay bullish on stocks in 2011 (beside the one offered earlier this month). The stock market has never recorded a down year in the third year of a U.S. Presidential term because Presidents tend to boost their odds of re-election with pro-growth policies toward the end of their terms.

A complication this time around has been the constraint of the government’s debt ceiling and fiscal deficit. However, with rating agencies threatening to cut the government’s AAA credit rating by mid-July, and government funds scheduled to run out by Aug. 2, there should soon be some agreement in Congress on the deficit and raising the debt limit.

A resolution of fiscal uncertainties may clear the way for the President to get on with the usual Presidential Cycle script. What’s needed is a pretext for ratcheting up the delivery of stimulative goodies, and this Obama has that in spades thanks to the current economic slowdown and drop in house prices to levels below the trough reached in the last recession.

The “double-dip” in U.S. housing prices suggests the stimulus will likely load heavily on financial aid to the housing sector. Indeed, earlier this month, an adviser to the White House told the media that the administration has grown frustrated with the languishing housing sector and is looking at ways to support it. There is also the stimulus to come from a ramping up of billions of dollars in funds previously set aside for the housing sector, plus payment of the billions of dollars in fines expected from the foreclosure mess.

Perhaps, then, we have another reason for staying the course on stocks—and for continuing to hold (as I do) the U.S Homebuilders ETF (XHB).

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