The Investment U E-Letter
Thursday, December 18, 2003

How to Play the ‘Election Year’ Stock Rally
By Dr. Steve Sjuggerud
President, Investment U

“Bush and Greenspan won’t let the market fall ahead of the election”

I hear that a lot these days. But when you think about it, it’s hard to believe

Can the President and the Fed chairman really manipulate the stock market, or is the market just plain too big? Would they really cooperate like that? And if so, is it time to buy stocks because Greenspan and Bush won’t let the market fall in an election year?

Let’s find out just how to approach stocks in the upcoming election year, for maximum returns And maybe do a little myth busting along the way.

Can the Market Really Be Manipulated?

My general belief is that the market is bigger than the government meaning that the government can’t control the market, as many people believe. However, I do believe that there are times when the government can influence the market.

Specifically, when the market is already predisposed to head in a certain direction, the government can give it a nudge. For example

Back in the Asian Crisis in the late 1990s, Hong Kong stocks had crashed, and really had bottomed. Trading activity dried up to nothing. The Hong Kong government announced a new policy of buying up shares to prop up the markets.

People got excited about stocks again, people knew the government was buying, and that there was support to the market. It actually worked. It was a nudge in the direction that the market wanted to go, at the right time.

When government manipulation doesn’t work is when the market isn’t predisposed to move in the direction the government wants it to go.

The Japanese government has been throwing money away for over a decade trying to manipulate financial markets, to no avail. Stocks are still down 75% since 1989, and the currency (the yen) has moved from 250 versus the dollar (in 1986) to nearly 100 lately, against the efforts of the Japanese government in recent years to prevent this.

Fighting the markets doesn’t work for governments. But well-timed nudges do, on occasion.

Okay, enough of my theories… let’s take a look at what’s really happened in past election years

Stocks Have, In Fact, Risen In Previous Election Years

The stock market has closed higher in 75% of all election years, going all the way back to 1888. The results are even better over a shorter time period…

Over the last half-century, only two election years were “down” years in stocks (versus 10 “up” years). Stocks have returned roughly 10%.

Compare that to the first two years in office In both the first and second year in office, stocks fell in more years than they rose. The average gain on stocks for those two years has been less than 4%.

The third year in office has traditionally been the best, averaging 18%. Interestingly, Bush’s presidency has followed the historical pattern so far. The first two years in office, stocks lost money. The third year in office (this year) stocks are up over 20%.

If the pattern holds, stocks could do fine in 2004.

Could Greenspan Spoil Bush’s Reelection Campaign?

Some think that Greenspan wouldn’t raise interest rates in an election year that the President has a degree of control over him.

I think Greenspan will raise rates if he wants to, not caring too much what Bush wants. The historical record suggests the same

The Fed has raised rates in many recent election years specifically 1956, 1972, 1980 and 1984. But in the interest of full disclosure, Greenspan took office in 1987 so rates haven’t been raised during an election year on Greenspan’s watch.

All of this could be taken as a sign that 2004 will be a solid year for the markets. So any bears now going into hibernation - thinking a huge market correction is in the offing - might want to keep their eyes open for a little while longer.

Today’s IU Cribsheet

• You know, after giving you the full story here and knowing this information I have to say that I don’t care much about election years versus non-election years. If a stock is expensive, it’s expensive And I’m not buying. I find that some facts - like the one about stocks doing well in election years - just give people justification for hanging on to their overpriced investments. Whenever I invest, I want to buy at a good value. And I don’t think the overall stock market represents good value at this moment, regardless of the fact that we’re entering an election year.

Good Investing,

Steve

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