"Presidential" Portfolio Planning

12/24/2004 12:00 am EST

Focus:

Sheldon Jacobs

Author, Investing Without Wall Street, Five Essentials for Financial Freedom

"We do not use technical analysis to time the market; however, we do take note of market cycles to help position our portfolios," says Sheldon Jacobs, editor of No-Load Fund Investor. "O ne tool we use to forecast the market’s direction is the four year presidential cycle."

"The first year after a presidential election has traditionally been the worst of the four year cycle. The market has declined in eight of the past 16 of those years. The second year of presidential administrations has been second worst. Also, the risk of major loss has been higher in the first half of presidential administrations. Since 1926, of the 10 years in which the S&P 500 has lost more than 10%, nine were in the first or second years of the presidential term. Why? It could be extraneous factors, but we suspect that a president’s natural desire to be reelected (or to help his party’s next candidate) has something to do with it.

"Administrations try to time tax cuts and government spending so that the economy picks up during presidential election years. This helps to lift company profits and investor spirits, so stocks rise and citizens are more likely to vote for incumbents. Once the election passes however, whoever wins has to correct some of the excesses of the previous two years by exercising at least a modicum of fiscal restraint. That’s exactly what appears to have happened in this cycle. Increases in federal spending as well as tax cuts helped the economy and the stock market rebound strongly in 2003 and produce moderate gains in 2004. For fiscal 2005, however, despite some gluttonous portions of pork, Congress and President Bush appear to be engaging in significantly greater fiscal restraint.

"Meanwhile, growth in corporate profits is likely to slow to a more normal pace of about 7% in 2005. The market tends to struggle during such slowdowns in earnings growth, with its riskier companies being especially vulnerable. Rising interest rates are generally bad for stock, and our bet is that the Fed will raise the interest rates under its control, as short-term rates are too low given the economy’s generally strong performance, inflationary pressures are emerging, and the dollar continues to be weak.

"If the presidential cycle, valuation, earnings, momentum, and interest rates all point to lower stock prices, why aren’t we projecting a substantial loss in 2005? Mainly because the economy looks to be in a sweet spot of 3% to 4% growth, after inflation, and the risk of an economic downturn appears low. Thus, despite our ‘best guess’ that the broad market will fall somewhat in 2005, we expect our portfolios to produce gains. In a flat to declining market, lower risk funds with excellent stock pickers can beat the market and produce excellent results. It’s also more likely that the market will perform well early in the year before faltering later."

In his in-depth, 24-page monthly issues, Jacobs features a wide variety of "best buys" portfolios, designed for investors in specific mutual fund families, such as Vanguard, T. Rowe Price, Fidelity, and Schwab. Within each of these families, he offers portfolio recommendations for long term wealth building, pre-retirement, and retirement portfolios. As a sample, we offer you his "master wealth building portfolio", which includes selections from a variety of fund families:

Baron Small Cap (BSCFX)
Janus MidCap Value (JMCVX)
Vanguard Total Stock Market Index (VTSMX)
Artisan Mid Cap Value (ARTQX)
Muhlenkamp Fund (MUHLX)
T. Rowe Price Emerging Europe and Mediteranean (TREMX)
Causeway International Value (CIVVX)
Fidelity New Markets (FNMIX)
Vanguard Short-Term Investment Growth (VFSTX)

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