The U.S. Stock Market: Five reasons 2007 is looking like 1995

Everyone is concerned about the equity markets for next year with many pundits predicting the bull market is breathing its last breath. Earlier this year in my post What the Bookies Are Saying About the Upcoming Bear Market, I was cautiously bullish about the equity markets, and I remain so for 2007.

In several ways, 2007 is beginning to look like 1995, which was a good year for the stock market. The S&P 500 was actually up 37.43% in 1995. Although I am not predicting a Blowout year like that, 2007 could be a decent year for equity returns. Let's look at some of the potential similarities between 2007 and 1995:

· Both years are shaping up to be years in which control of the government split between the two parties. In 1995, we had a new Republican Congress and a Democratic President. In 2007, we look to have a Democratic Congress (at least in the House) and a Republican President. In my earlier post, Poll News May Be More Important Than Fed News for the Stock Market, I pointed out that the equity markets usually like gridlock because it restrains the spending impulses of both parties.

· Presidents in both 1995 and 2007 will be more concerned with preserving their legacies than getting into bruising political battles with the newly empowered opposition. This will be especially true if the Democrats launch investigations into Bush's actions as the Republicans did with Clinton .

· Both 1995 and 2007 will be pre-election years for President. Historically, this is the strongest year in terms of stock market returns in the election cycle.

· In 1995, the Fed switched from tightening to easing interest rates. Although it is too soon to tell if the Fed will ease in 2007, it has definitely put the tightening cycle on hold and remains focused on the negative effects of a deflating Housing Bubble.. I discussed this in detail in Chairman Ben Walks the Greenspan Line.

· Inflationary pressures are easing, giving the Fed the opportunity to declare at least a temporary victory over inflation just as happened earlier at the end of 1994 and the beginning of 1995.

There are possible flash points which could derail this scenario such as a crisis in the Mideast . However, support for military action against Iran becomes less likely with a Democratic Congress and declining multi-national support. Confrontation with North Korea follows a similar line as well.

If the economy weakens further and the Fed decides to cut rates, 2007 begins to look even more like 1995.

Remember always to separate the news from the noise.

Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.