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Don’t count on election bull market

Updated: May 3, 2013 12:14PM

Originally published: July 13, 2000

For the first half of the year, the average bank certificate of deposit performed better than the average stock mutual fund.

Even aggressive growth funds so far this year turned in an average category gain of only 6.5 percent, while the technology sector funds eked out only a 4 percent return.

And if you’re counting on election-year economic euphoria to bail you out of losing investments, you’d better count again.

Normally, presidential election years are fairly benign for the stock market. According to InvesTech Research, since 1956 not one presidential election year has seen the S&P 500 lose ground during the campaign season. That should give hope to those who are predicting a stock market rally to put the averages into more positive territory.

But don’t get your hopes up for a repeat of the last few years’ big gains. A study of presidential election years also shows that seven of the last 10 election years resulted in less than a 7 percent rise in the market between May 1 and Dec. 31.

In The Stock Trader’s Almanac, editor Yale Hirsch notes that this is a `lame-duck’ election year--and that has an unpleasant historical ring. In the last 176 years, says Hirsch, only seven other presidents besides Clinton have been lame ducks. And the market lost ground in six of those seven final years! (Only under Ronald Reagan, the last lame duck, did the market gain: a sparkling 11.8 percent in 1988--but that was after the disastrous decline of 26.1 percent in 1987.)

One reason investors count on election-year stability is the feeling that as the election actually approaches, the Fed will be less willing to make dramatic moves in interest rates. In the 87 years since the Federal Reserve was formed in 1913, there has been only one discount rate hike in the two months before Election Day, reports InvesTech.

That statistic was small consolation to Jimmy Carter, the one exception, who saw his presidential re-election bid quashed by a fall rate hike in 1980. Under Paul Volcker, the Fed was more concerned about throttling inflation than the election campaign.

Will Alan Greenspan leave a weaker legacy when it comes to politics vs. the economy?

Another rate hike would impact on an already-slowing economy, which is Greenspan’s avowed goal. We’ve already passed the point when you could argue that the “new economy” doesn’t care about interest rates. The Nasdaq managed a significant rally every one of the seven times the Fed raised rates since last June. But the eighth time, in May, the Fed’s action resulted in a 14.8 percent decline in the Nasdaq.

Jim Stack of InvesTech market research says that’s confirmation that market participants no longer believe the new economy can play by its own new rules.

Stack points out that the Fed now is targeting the unemployment rate as the best measure of future inflation. Fed governors are trying to slow the economy just enough to raise unemployment by about 1 percentage point.

Now, here’s the kicker. Stack’s research shows that over the last 50 years, whenever the unemployment rate rose by 1 percentage point, the result was a recession within the next 12 months. Interest rates aside, more than half the recessions of the last 80 years have begun in the 12 months after an election year, when the Fed is twice as likely to raise rates in the post-election period.

If you’ve noticed lately, the market is paying an inordinate amount of attention to earnings reports--down to the very last penny. That’s another big change from just six months ago when earnings supposedly didn’t matter in the new economy.

In the days ahead, we’ll have a slew of quarterly corporate earnings reports. Is anyone expecting positive surprises in the numbers? And what happens if there are disappointments?

It’s not wrong to be bullish on the stock market over the long run. History shows that’s been the winning strategy.

But if you’re basing your short-term, election year optimism on history, you’d better take a closer look at what the pages of the history books are actually saying.

And that’s the Savage Truth.

Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.

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