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Markets

Stocks Get Her Vote

As election seasons approach, watch the economy, not the polls.

Veteran Wall Street strategist Gail M. Dudack is managing partner and director of research at Dudack Research Group.

KIPLINGER'S: The first two years of a presidential term are historically lackluster for stocks, with a bottom just before midterm elections, followed by a boom year. Will that be the case this time?

DUDACK: Like many cycles, the presidential cycle has an economic foundation. Spending programs flourish ahead of an election, but once in office, politicians do the tough stuff -- tax increases, spending cuts -- right away. But this year, you've got a president who's not going to be re-elected, so you might not see that pre-election spending. And you've got a Federal Reserve Board seeking stability. In any case, I believe wise investors should be aware of these historical patterns -- but suspicious at the same time.

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Suspicious, why? If making money from the four-year cycle were that simple, we'd all be millionaires. I think that misconception kept many people negative on 2006, wrongly. We got a great buying opportunity in June that had nothing to do with cycles.

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What about 2007? The average gain in the SP 500 in pre-election years dating back to 1888 has been 11%. I'm bullish too, but for other reasons. In this economic cycle, companies in the SP 500 index have had 17 consecutive quarters of double-digit earnings growth. Cash flow is terrific. Corporate balance sheets are so healthy now. The question is, as consumers pull back, will companies spend enough to drive economic growth? I say yes.

What can investors glean from historical patterns? It's difficult to use this information strategically. If you're a long-term investor with a balanced portfolio, you should ride out cycles anyway. If stocks tumble in a midterm election year, just tell yourself it's only the four-year cycle.