Experienced investors are well-aware that reliance upon a historical trend to forecast the future is a dangerous strategy. The world sometimes changes. Events that once triggered a stock market rally suddenly stop occurring and, presto, widely anticipated rallies suddenly fail to occur.
That said, some historical trends are remarkably strong. A good example is the behaviour of the UK stock market in the year preceding a US presidential election.
Over the long-term, history teaches that UK shares always seem to rise in the year preceding a US presidential election. The next election is scheduled for 2008, a good sign as far as 2007 is concerned.
The reason for the rally is linked to the age-old desire of politicians to win elections. Presidents are not immune to this competitive instinct. They take steps to insure favourable economic conditions are in place when voters step up to the ballot box.
A forward-looking stock market factors these economic bribes into the price well in advance. Given the size and dominance of the American economy, any action that boosts the domestic economy typically has knock-on effects on our side of the Atlantic as well.
Since 1952, there were 14 presidential elections. UK shares rose in the prior year each and every time. The pattern was the same regardless of the strength of the economy, or the political party in power.
The UK stock market even rocketed up in 1975, the mid-point of a horrid decade-long period of recession and inflation.
War appears to have little effect on this trend. Prices rose in 1951 when the US Army was fighting in Korea and in 1967 when the unpopular war in Vietnam was heating up.
Presidential popularity or effectiveness also has no effect. Richard Nixon was one of America's most unpopular presidents yet shares rose in the year preceding each of his election wins. Jimmy Carter is widely viewed as being one of America's most ineffectual leaders. This did not stop shares from rising in 1979, the third year of his term in office.
More recently, prices fell in 2000, 2001 and 2002. But recall that the lengthy bear market came to an end in 2003, the third year of George Bush's first term in office.
The average annual UK gain in the 14 pre-election years was 28%. Part of the reason was due to an incredible 136% gain in 1975 as we bounced back from our worst-ever bear market. But even if 1975 is eliminated from the computation, the average gain for the 13 remaining years was 20%.
There are no guarantees when it comes to the stock market. Even so, prospects for 2007 look quite rosy as long as the stock market follows past trends.
Unfortunately, there is one fly in the ointment this time around. Pessimists note that American consumers have been steadily bribed with low interest rates, low taxes and budget-busting spending programmes ever since George Bush took power six years ago. The extent of government support to the economy has been unprecedented.
Some pessimists believe stock market returns have been boosted by the Bush administration for too long and by too much. According to them, if there was ever a year for the pre-election year rule to fail, 2007 is it.
Which side of the debate will prevail? We shall soon see.