Good time to buy stocks, indicator says
TERRY SAVAGE email@example.com Oct 7, 2010
Updated: May 3, 2013 12:14PM
Q. I have a simple question for you: Is this a good time to buy stocks?
A. Ordinarily, I'd give you an equally simple answer: It's always a good time to buy stocks -- if you have a long-term perspective and are buying a diversified portfolio of stocks using a mutual fund.
That's an answer I always use to duck that question, because I truly believe that a regular program of investing is a better approach than trying to "time" the market. And I do believe that, over the long run, you want to invest in the future of America.
But today, I have a different answer. Start by looking at the chart on this page, because a picture is truly worth a thousand words (which is a few hundred more than my editor will give me).
The graphic shows the difference in results between two investors who get in and out of the market based on the presidential election cycle, going back to the 1950s.
Investor A invests in the S&P 500 at the midpoint between presidential elections, and sells out the day before the presidential election during each four-year cycle. This investor starts with $10,000. And by 2010 the portfolio is worth $235,890. And as you can see from the chart, that even includes a significant drop because of the recent bear market.
Investor B starts with the same $10,000 invested in the S&P 500. But this investor does exactly the reverse -- buying the day after a presidential election, and selling at the mid-term election. This investor's portfolio has a paltry gain over the last half century, currently worth only $10,689.
Just to make things clear: We are today about at the "midpoint" -- the point at which Investor A puts his money in the market!
Credit for this chart goes to James Stack of Investech.com, who writes a stock market newsletter that is always replete with historical information. Of all the charts and comparisons he has made over the years, this one always strikes me as the most astounding in its consistency.
Or is it astounding?
New presidents (or even those elected to a second term) try to get the tough stuff out of the way immediately after they are elected -- whether it's tax increases or controversial spending programs. That's typically bad news for the economy. But in the last two years of a presidential term, there is often more pandering to voters and more easing of credit, which typically leads to a rising stock market.
You can choose to believe in this indicator or not. I find it compelling. And if you need more reasons to be bullish right now, Stack's latest letter gives another half dozen reasons he thinks stocks will rise from current levels. For example, the low interest rates on safe government securities, such as 90-day T-bills, make stocks far more attractive than cash.
Many of Stack's technical indicators based on breadth, volume, and advances vs. declines, also are sending bullish signals. And Stack notes the rise in gold prices, which indicates a fear of inflation. But he points out that stocks have historically kept up with inflation, giving another reason to invest now as stocks are valued more realistically than gold in his viewpoint.
But the greatest bullish argument revolves around consumer sentiment -- which has been extensively pessimistic. Says Stack: "The best market gains often occur from levels of extreme pessimism."
Yes, of course, there's another side. I'll let the bears have their say, as well. But if you believe in historic cycles, the picture on this page may be worth more than a thousand words; it could be worth a lot of dollars in your retirement fund. And that's The Savage Truth.
Terry Savage is a registered investment adviser.