One reason i'm bullish is that the federal bud-get deficit is so high. Yes, you heard that right. If you prize prudence in financial matters, you may be surprised or offended to hear that federal deficits are associated, at least in the short term, with bull markets. But the historical pattern is unmistakable: When the federal deficit (as a percentage of gross domestic product) spikes, stocks do well in the intermediate term. Budget surpluses generally have led to dour markets. Pray for more and bigger deficits. Our biggest recent spikes in the deficit relative to GDP were in the fourth quarter (Q4) of 1949 at 3%; Q1 of 1958, 1971 and 1975 at 2%, 2% and 6%; and more recently in Q3 of 1982 and Q2 of 1992 at 5%. In none of these six cases were the subsequent 12- and 24-month returns negative; the averages were 21% and (annualized) 12%. Surpluses have been followed, on average, by subpar returns. The deficit, now running at about 4% of GDP, is likely to turn down. In other words, we've got one of those spikes.
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