Stocks Get Her Vote

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.

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.