Election Year Investing

08/16/2012 10:00 am EST

Focus: MARKETS

Mark Hulbert, editor of the Hulbert Financial Digest, shares some little-known facts about what investors can expect in the fourth year of the stock market's election cycle.

Investing in an election year. We have some ideas for you now from Mark Hulbert.

The presidential election-year cycle is one of the better-known cycles in the investment world. It's very well known.

Most of the focus on that cycle is on the third year, which tends to be one of the better years of the cycle. That makes a certain amount of sense, as we're leading up to a presidential election. Obviously, the incumbent party is going to try to do whatever it can to make the economy and the market look good.

But less well known is the tendency for the fourth year, which is where we are in right now. So, that's worth looking at. It turns out that actually there is a slightly positive bias to the market, nothing like we saw in the third year, but nevertheless worth perhaps thinking about.

It means that the correction for this coming summer and fall period is probably not-if you look at the seasonable tendencies at least-going to be anywhere near as severe as what we saw either last year or in the year before that. Each one of those years, of course, did have a fairly severe market correction during the summer months.

That would certainly help the incumbent.

Well, that's right, and indeed, this is not a comment on either Democrats or Republicans. Every incumbent party, obviously, is going to try to do what it can to make things look rosy on Election Day, and there's some evidence that they will do whatever that takes. It's probably worth betting on.

There's a saying on Wall Street, "Don't fight the Fed." In this case, that would probably mean that the stock market won't have as big of a tumble as you might otherwise expect given all the bad news we've seen recently.

That was my next question. Let me lob you a softball. What can we expect this year, do you think?

Well, if you look at the historical tendencies alone, it looks like it will be an average year, which is not all that bad. An average year tends to be a market up about 10% to 12% for the year. Given some of the predictions of how bad things could turn out, I think a lot of people would be very happy with 10% or 12%.

I think we'll probably see some summer weakness. That's not all that unusual, but it's going to be relatively limited, and I think it's not a bad bet to expect that the economy and the market is going to look pretty good on Election Day.

You've got a favorite phrase I know that's often used, "Sell in May and then go away." Does this cancel out that pattern?

I think in some part it does. That sell in May and go away pattern is this well-known seasonable tendency that is a separate pattern all together from the presidential election-year cycle, but of course, all the cycles don't necessarily match up.

Typically, that pattern says the six months between May Day and Halloween are the worst months for the market. Indeed, we saw it in spades the last two years. This year, I would suspect that we're not going to see that kind of weakness over that period of time, which is to suggest that maybe the presidential election-year cycle will slightly trump the sell in May and go away pattern this year. So, perhaps there's a reason to stick around rather than sell.

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