Election years and the stock market

June 1, 2004
The United States is approaching the time of year when the presidential election campaign goes into high gear, and the economy will be one of the major issues. In past years, presidential elections have had a significant impact on the stock market.

Marvin Appel, MD, PhD, and Brian Hufford, CPA

The United States is approaching the time of year when the presidential election campaign goes into high gear, and the economy will be one of the major issues. In past years, presidential elections have had a significant impact on the stock market. In this month's column, we discuss the potential implications of the election for your investment decisions.

Why elections matter

Incumbent politicians have tended to use their authority to make the economy appear as bright as possible in the period leading up to the election. Tax cuts, new spending programs, and stimulative Federal Reserve policies have been relatively concentrated before elections, with implications for the stock market.

This election cycle is no exception. In 2003 the government cut taxes and enacted a new spending program, the Medicare prescription drug benefit. Although rising energy prices have nullified much of the impact of the tax cut in terms of additional income available to spend, most experts agree that without the tax cut, consumer spending — and hence economic growth — would be slower.

We are entering the best time of the election year

Since 1900, the Dow Jones Industrial Average has risen an average of 9.9 percent from May 31 to Dec. 31 during presidential election years. In contrast, the index has lost 0.6 percent, on average, during the first five months of previous election years since 1900. Pre-election years have been even better, producing average gains of 10.8 percent in the Dow during this period. Postelection and mid-term years (2005 and 2006 in the next presidential term) have been below average, with gains of 4 percent and 1.8 percent, respectively. Note that these are price-only returns, and do not include dividend income.

Implications

The election cycle suggests that investors should consider holding onto their equity investments until year-end, if that agrees with your financial situation. If your investment objectives call for adding money to the stock market, now might be a good time to act.

Large company stocks, especially those whose sales and profit prospects are not expected to be as sensitive to the rate of economic growth as the market overall, are good places to invest based on election- year seasonality.

One investment vehicle worth considering is the exchange-traded fund that tracks the Dow Jones Consumer Non-Cyclical Index. Its ticker symbol is IYK. The stocks in this index are familiar names in consumer product areas — Proctor and Gamble, Coca Cola, and Altria are the three largest in this index.

Health care is another area that appears to offer above-average prospects in the current economic climate. The Dow Jones U.S. Healthcare Sector Index Fund, ticker symbol IYH, offers a convenient investment choice. This index contains large drug company stocks (about half of the total index), with the remainder allocated to biotechnology, medical devices companies, and health care providers.

Both of these sectors (health care and consumer goods), as well as technology, are equally represented in a single diversified index fund investment — the iShares S&P 500 Growth Index Fund, ticker IVW.

2005 and beyond

After year-end, election cycle history suggests the risk-to-reward balance will become less favorable until the start of 2007. As a result, you should shift your stock market investments towards less volatile selections, closely monitor the value of your portfolio, and be prepared to cut your losses if necessary.

As with any calendar-based investing strategies, there is no guarantee that the market's performance during the current election cycle will resemble its average historical performance. Your particular circumstances may warrant investment actions that do not agree with the election cycle strategies discussed here.

Dr. Marvin Appel is CEO of Appel Asset Management. He holds a degree in biochemical sciences from Harvard College and earned his MD in 1991. He is coauthor of Systems and Forecasts. Contact him at (516) 487-7146 or [email protected]. Brian C. Hufford, CPA, CFP, is president of Hufford Investment Advisory Programs, LLC, and Hufford Financial Advisors, companies dedicated solely to helping dentists secure solid financial planning and safe investment strategies. He can be reached at (317) 848-4987.

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