Personal Finance: Bernanke bears
Ben Bernanke got the nod from the Senate Banking Committee to become the next chairman of the Federal Reserve Board, with a full Senate vote expected in January.
The Dow Jones industrial average reacted to the news with a ho-hum: It had barely budged by midday. Yet if history is any guide, a new chairman at the nation's central bank may mean it's time for investors to step to the sidelines for a while. "The last few Fed chiefs, starting with Arthur Burns in 1970, all took office prior to decent bear markets," says Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac.
Consider: Arthur Burns assumed the Fed's top job in February 1970, and the stock market bottomed three months later. Paul Volcker became Fed chief in August of 1979, and the market bottomed the following April. Two months after Alan Greenspan took office in August 1987, the stock market lost nearly a quarter of its value on Black Monday, October 19.
What explains the dips? Hirsch points to a gap of confidence in the early days of a new chairman's tenure. "Everyone is used to the old chairman, and the new one is a bit of a wild card," says Hirsch. "Investors tend to get out of the way and see what a new chairman will do. When they step out of the market, that has the capacity to create a downdraft."
In addition, midterm election years (2006 is one) often coincide with market bottoms–it has happened in nine of the last 14 four-year cycles, according to Hirsch.
But the bears very likely won't arrive until the new year. Hirsch is looking for a continued stock market rally–though not a very strong one–through January. The Dow is up about 6 percent since mid-October.
Hirsch's advice: "Use the current rally to lighten up some positions and get ready for a difficult 2006." The good news is that a bear market engendered by a change at the Fed will help flush out some of the underlying weaknesses in the market, says Hirsch. "We might find ourselves in a bit of a bear cycle, but on the flip side, it has the potential to create the first real bull market of the 21st century."
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