The Investment U E-Letter: #352
Monday, July 12, 2004

“Guaranteed” Election-Year Profits? Not So Fast
By Dr. Steve Sjuggerud
President, Investment U

“Stocks can’t fall this year it’s an election year”

Wall Street firms, in their effort to get you to buy stocks, love to tell you this little fact: “Between 1964 and 1996, stocks rose in every presidential election year.”

While The Street may not be lying to you, they’re being a bit disingenuous

I went back and looked at the numbers. And I found something that may have been more important: During those election years (1964-96), stocks just so happened to be a good buy. And the fact that they were appears to have nothing to do with election cycles!

For example, the average P/E ratio of the Dow Jones Industrials during those election years was 13.

But during election years before and after 1964 and 1996, respectively, stocks were expensive

Expensive Is Expensive, Politics Aside…

Stocks fell in 2000, an election year. In 2000, the P/E of the Dow was above 20 – expensive, way above historical averages, and way above the election years of 1964-96.

In 1960, the previous time stocks fell in an election year, the P/E of the Dow was 19, again well above averages.

Today, an election year, the P/E of the Dow is 19 – again, well above historic averages. If you’re truly looking at history repeating, stocks may be down this election year.

How about this Whenever stocks trade at a P/E of 19 or higher in an election year, odds are, you’ll lose money

(Of course, any expert in statistics would tell you that all of these results are garbage, as there aren’t enough data to reach a legitimate conclusion anyway.)

Forget the Broker Pitch… And Concentrate on What Really Matters

The question is, does it really matter to your portfolio if we’re in an election year? Or is what you’re getting for your money more important? I’d argue it’s the latter that you need to pay attention to.

The value that you’re getting for your money in stocks right now is not good. So it’s not surprising that stocks are down so far this year – election year or not

I dug deeper to get some (hopefully) more meaningful results. I went back and looked at election years and stock values since 1920 (as far back as I have decent Dow data with earnings and book values).

And I found that election years actually aren’t that exciting for stock owners

The average gain on the Dow Industrials every year since 1920 has been about 8%. (The return on the Dow in election years, in particular, was about 8%. What’s so exciting there?)

And since 1920, the Dow has fallen in seven out of 21 election years Said another way, the Dow fell one out of every three election years – or 33% of the time.

I could go on, but you get the point

Wall Street brokers are always looking for an excuse for why stocks will go up (and, therefore, why you should keep your money with them). This year, there’s no “New Era” to pitch and stocks aren’t cheap. So the best they could come up with this year is, “It’s an election year, and therefore stocks won’t fall”

Gimme a break.

Don’t fall for this “common wisdom” – that is based in no wisdom at all

Don’t stay heavily invested in stocks simply because it’s an election year. Because stocks can fall from here. And based on how expensive stocks still are, they may well do just that.

Today’s IU Cribsheet

• Judging by historical measures, value – not elections – drives stock prices. To read about Daniel Drew, an investor who perfected the art of getting value from his stock portfolio, check out Investment U E-Letter #319 What Always Works.

Good investing,

Steve

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