June 10, 2008
Investing in an Election Year
The social mood is what drives the financial markets, much more than earnings, the price of oil or anything else. The mass psychology of the buyers and sellers is the single most important factor in successful investing.
Every four years we have a presidential election in the U.S. and the accompanying propaganda and half-truths from all sides really affect the social mood, and by extension your investments.
There is a well documented 4 year cycle in the stock markets. What does it suggest that we might expect?
There have been 14 presidential elections since 1949. Election years have lost money only twice since 1949 (10% in 2000 and 3% in 1960). This means the stock market has produced gains in 12 of 14 election years. Not bad.
The average gain in an election year is 9% per year, excluding dividends. And in January through May of those years, the markets have gained an average of 2.1% (source: SignalTrend).
As of this writing, June 7th, the stock market1 was down 7.33% year-to-date. This means 2008 is currently 9.4% below a normal election year result for this time of year.
Remember that the stock markets never go in a straight line for very long. They continually zig and zag as market “corrections” pull the markets back toward their historical directions.
We are still a long way below average for an election year, and the stretched-rubber-band effect exerts more pull back toward the average the further and longer we are away from the average.
What this means to us is that the 2008 below average performance suggests that a period of upward moving stock prices is still ahead of us as the pull back toward the historical average intensifies. That is good news for investors.
The More Things Change
Could the US stock markets break records and become the worst election year in history? Sure, anything is possible. There are a lot of scary things going on around us. But there have always been lots of scary things and we have come through all of them OK.
In my lifetime, there has been the Vietnam war debacle; oil embargoes that pushed the price of oil up to 10 times its earlier price in just 6 years; 20% interest rates in the early 1980’s; massive numbers of bank failures in the 1989-91 period. I could go on and on but you get the point.
The point is that we are still here. Still worrying perhaps, but not much has really changed.
Consider this magazine article I use in my Yavapai College classes:
It is a gloomy moment in the history of our country. Not in the lifetime of most men has there been so much grave and deep apprehension; never has the future seemed so incalculable as at this time. The domestic economic situation is in chaos. Our dollar is weak throughout the world. Prices are so high as to be utterly impossible. The political cauldron seethes and bubbles with uncertainty, war is in our future, and Russia hangs as usual, like a cloud, dark and silent on the horizon. It is a solemn moment. Of our troubles, no man can see the end.”
Harper’s Weekly Magazine – October 1857
So, the more things change, the more things stay the same.
Politicians may ask “are you better off than you were 4 years ago?” That question is a distraction, because gauging fuzzy things like health and welfare over only 4 years is pretty tough. But, let me ask, are you better off financially than you were during the 1970s or 1980s or 1990s? I’ll bet you clearly are. And I also bet you’ll be better off another 10 or 20 years down the road despite what you are worried about today.
Relax. It’s going to be OK.
The stock market is often referred to as a single entity, but in fact there are distinctly different segments. Since May 19th different markets have gone in different directions, which is rather unusual. The Dow and S&P 5002 have gone down, the tech heavy Nasdaq has gone up, and the Russell 2000, made up of small companies, has gone up. Each of these items is giving a little different signal, and it is just too early to know exactly what it all means.
As a result of this uncertainty I have decided to reduce our risk and I have lowered our exposure to the stock market for our growth strategies. I have also sold some of our high yield bonds so that the Flexible Income strategy is about 1/3 in cash. We have made nice gains over the past few months in all model accounts1 and a shift to being more defensive to preserve our gains may be prudent.
Want to Help Our Troops?
Having been a long way from home while I was in the Army from 1971-74, I can tell you how lonely it was and how mail call was a highlight of the day.
If you would like to put a ray of sunshine into the life of a soldier in Iraq or Afghanistan, consider sending a gift pack through this neat online service someone mentioned to me.
You can go online and send candy, electronic gadgets, toiletries and more to be distributed to our soldiers. The most requested item by troops in the field? Baby-wipes.
Treats for Troops is a non-profit organization founded in 2003. Check it out. http://www.treatsfortroops.com/
“We sleep safe in our beds because rough men stand ready in the night . . .” George Orwell
Dealing with Financial Spam
Are you frustrated by email teasers from investment newsletters and advisers? You could just hit “delete” or better yet have your computer’s spam filter label it as junk and send it to email never-never land.
But some seem really intriguing, don’t they? Once you understand the game these hucksters are playing, you may not think so.
But what of their claims of: “Profit Safely”, “Last chance . . . before this goes public”, “Get ready for 566% gains or more in biotech”, “2 cent oil stocks that go to $2”, or “profit like an insider”. One of my favorites is “801k plans your broker doesn’t want you to know about”.
In case you’ve never heard of 801k plans, don’t feel alone. I hadn’t either. 801k is an invented name (unlike 401k which is a section of the IRS tax code) used to promote dividend reinvestment plans. Invented is the operative word here.
Usually these articles are written to tease you into subscribing to some newsletter. One purveyor of this garbage sells at least 16 different newsletters with a variety of themes. They use a free email newsletter to systematically “tease” you into considering each one.
A licensed broker or registered investment adviser like Hepburn Capital, can’t use misleading advertising like this. But these guys are writers, not financial advisers. As such they are not regulated. This means you have no protection from them beyond your delete button.
A few weeks back I wrote about a seminar group that was preying upon unsophisticated investors. They were educators, not licensed advisers. This week I am talking about newsletter writers doing the same thing.
Do you see a pattern here? One of wolves sniffing around your money? I see it. One wolf or another has always been there. I am just trying to provide a word to the wise about their latest two manifestations.
A good resource if you find yourself confronted by wild claims is Stock Gumshoe. This website investigates outlandish claims and publishes reports on what they find. You can see it at www.stockgumshoe.com. You have to register, but it is a free service.
A Tip For RV Owners.
One of my great sources of pleasure is climbing in my motorhome and taking off. The sense of freedom I get from not being tied to a schedule that a motorhome allows is something I really enjoy. Until I have to get the motorhome fixed, that is. The big RV stores can be brutally expensive, terribly slow and have disappointed me more than once.
So imagine my delight at finding a mechanic who can work on it all, diesel or gas engines, and coach items like refrigerators and electrical. And at prices I find reasonable, too.
If you have an RV or similar toy, talk to Andy at RMS Fleet service at 713 N. 5th Street in Prescott. It is a block or two off the beaten path, so call RMS at 277-1201 if you have trouble finding it.
1. The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
2. *The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Information in this newsletter is derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented or any opinions expressed herein constitutes a solicitation for the purchase or sale of any security. Adviser will not transact business unless properly registered and licensed in the potential.
Toll Free: (800) 778-4610 2069 Willow Creek Road
Local: (928) 778-4000 Prescott, AZ 86301
FAX: (866) 819-7711
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold. Therefore, comparisons to broad stock market indexes such as the unmanaged indexes listed above may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares are not insured by the FDIC or any other agency, are not guaranteed by any financial institution, are not obligations of any financial institution, and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence. Copyright Hepburn Capital Management, LLC