Election Year Investing
Since the 2004 presidential primary season is here, just a word to the wise. It is far better to pay closer attention to the bears and the bulls than take the elephants and the donkeys too seriously. As I've mentioned in these articles and on my national radio program, the markets (whether stocks, mutual funds or pork bellies) are controlled by supply and demand not by 15 or so votes in Dixville Notch, New Hampshire or primary day in South Carolina.
This is not to say that what the various presidential candidates do or discuss won't have an impact on market movement. But chances are basic fundamentals and corporate technical information will have more to do with a company's share price than what any particular candidate has done or will do between now and the November election.
There are a number of facts to get a handle on concerning election year politics and how it might influence your investments. One study, for example, points out that bear markets are rare in election years. For more than 50 years, from the early 1940's to the mid 1990's, each and every bear market has happened in the first or second year of a presidential term of office. But there are exceptions to every rule. A bear market began in January 1960 during the last year of President Dwight Eisenhower's administration. When that bear market ended in October 1960, stocks had lost 17% while the Industrial Average was at 566. John F. Kennedy was inaugurated in January 1961 and the next bear market started in December of that year, precisely on the historical schedule. And since World War II, the markets have registered an average annual return of 9.5 percent in the first year of any presidential term.
But every political machine knows a strong economy usually creates a confident feeling among the electorate which spawns higher stock prices and a stronger economy. What incumbent president will likely allow the economy to get stuck in the mud right before he asks the population to send him back to the White House? The party in power will always try to stimulate the economy in hopes of attracting the necessary votes to win. Makes sense to me!
Also, we must keep in mind that every newly elected president has to become familiar and comfortable with the job and that could take at least a year. The re-election of an incumbent president means we continue with the economic situation as we have come to know it for at least another four years; good or bad. For instance, right now the markets are generally trending higher, but so is the national deficit. Unemployment is down, but so is the value of the dollar.
Stocks prices can trade higher or lower whether it's a presidential election year or not. If we'd listened to the market analysts last year we all would have missed getting into one of the best markets of the past couple of years. Keep informed but remember to trade the way you always have. Whatever investment formula you use to create wealth, stick to it. Of course, make certain you do plenty of research before buying any individual issues of stock. Make all your investment decisions without emotion and always remember that it is supply and demand that makes the share price move, not election year presidential politics.
Originally published in the Outspoken e-newsletter.