A Sure Bet
It's a presidential election year. That's good news for your investment portfolio
A Bush victory could also bring more pro-investment tax cuts, which presumably would charm Wall Street. "I think if the president wins, he will make existing cuts permanent and go after lower rates still, such as on dividends, whereas his opponents would probably rip the tax cut out by its lungs," says hedge fund manager John Rutledge, who is looking for a 10 percent return on stocks in 2004. "How the stock market does next year is heavily dependent on the election. It's an election more important than most."
Deficit politics. Democratic front-runner Howard Dean, the former governor of Vermont, and several other rival candidates have advocated repealing the Bush tax cuts. Sen. John Edwards of North Carolina, in particular, has made a point of criticizing the recent cuts in the dividend and capital-gains rates. Then again, Dean and other Democrats have also attacked the big budget deficit under Bush, arguing that a Democratic vote will bring back the fiscal responsibility of the Clinton years. "So it is possible that the market would see the other side of things and view a reduced budget deficit as a positive, " says Schweitzer.
Indeed, the market has done well with either party in the White House. And recessions certainly have no political affiliation. A study of presidential politics and market performance by the Federal Reserve Bank of San Francisco found that for the period 1871-1997, the average annual returns for Republican and Democratic administrations were 10.5 and 11.7 percent, respectively. More recently, since World War II, the average annual return under Republicans has been 13.1 percent and for Democrats, 15.3 percent. "The evidence indicates slightly, but not statistically significant, higher returns during Democratic administrations," the authors conclude. Nonetheless, investors would probably be happy to pocket the difference, however meaningless to statisticians.
Investors should also note that 2004 is not only the fourth year of a presidential term but the second year of a bull market. A recent study by Ned Davis Research looked at sector performance over the first two years of six bullish cycles since 1980. The top sector, information technology, has a historical average two-year gain of 105.1 percent and has already surpassed that 24-month performance with a huge gain in 2003. But other top sectors such as healthcare, consumer discretionary, financial, and consumer staples still have plenty of room to run (story, Page 49). Those groups all need gains of more than 25 percent to hit their historical average.
Of course, you'll want to do plenty of research before buying any individual stocks or mutual funds. And while the election cycle indicator is an entertaining and illustrative barometer to be aware of, that doesn't suggest investors should abandon a buy-and-hold strategy in favor of market timing. Indeed, the broader point is that in investing, time in the market is more important than timing the market. In other words, whatever year you pick to embark on a long-term investment plan, you really can't go much wrong with any of them. If only we could say that about all our presidents.
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