Presidential elections are good for stocks, but ...

The trend: Since 1952, stocks have risen in the last seven months of every presidential election except two. The trouble: Both exceptions occurred in the 2000s.

By , Correspondent

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    Then presidential nominee Sen. Barack Obama (D) of Illinois (left) spoke with Republican presidential nominee Sen. John McCain (R) of Arizona at the conclusion of a 2008 presidential debate at Hofstra University in Hempstead, N.Y. Stocks have generally risen during presidential elections, but the 2008 was a big exception, with the Standard & Poor's 500 index losing a third of its value in the last seven months of the election.
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For investors wondering what 2012 will bring, Montana-based InvesTech Research has a hot tip: Stay in stocks.

"The fact that we're approaching a Presidential Election likely improves the chances that this will be a good year for the stock market," writes James Stack, president of InvesTech Research, in a recent portfolio strategy report. He especially likes the energy, health-care, and technology sectors because they're poised for growth and offer some attractive valuations.

It's a strategy based on precedent. Going back to 1836, the Dow Jones Industrial Average (DJIA) has climbed an average 5.8 percent in presidential election years. That's better than in the first two years of presidential terms, when the Dow has returned an average 2 percent and 4.2 percent respectively.

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The last seven months of an election year almost always juice stockholders' portfolios. They've delivered positive returns for S&P 500 stockholders in all but two election years since 1952.

The correlation is no coincidence, according to analysts who specialize in long-term cyclical patterns. Since politicians want to get reelected, they do all they can to postpone tough measures and instead keep public funds flowing into local economies, at least until after the elections.

"They can grease people's wallets before they go into the voting booth," says Jeffrey Hirsch, editor in chief of the Stock Trader's Almanac and author of "Super Boom: Why the Dow Will Reach 38,820 and How You Can Profit From It."

Even if investors see a rosy pattern shaping up, the question nags: Is it likely to hold up this year? After all, 2008 was a presidential election year, yet the S&P lost a heart-sinking 33.5 percent over the last seven months. Investors learned the election-year rule of thumb has exceptions, and painfully sore ones at that.

Some students of market cycles are bracing for a bumpy 2012 and more trouble in 2013. Although election-year dynamics can buoy stocks, they can also be trumped by larger, "long wave" cyclical forces, according to David Knox Barker, a market cycle analyst and publisher of The Long Wave Dynamics Letter, which analyzes long-term trends.

Mr. Barker says these forces could once again supersede politicians' best intentions, as happened in 2008. This time, he says, watch out for ripple effects from a $1.3 trillion US deficit, European debt woes, and deflationary pressures on fragile economies around the world.

"If you're going to be in stocks, I think you go for large-cap, dividend-paying equities for any up move this year," Barker says. "But you just want to be very careful because the long wave could come in and crush the election-year party."

Mr. Hirsch says investors stand to reap modest election-year benefits this year. Markets tend to show more confidence after both major parties confirm their nominees around April and usher in improved returns in the year's second half.

What's more, stock values tend to rise when a sitting president is running for reelection. Since 1900, DJIA returns have averaged a healthy 9 percent whenever the White House occupant wants to stick around. Whether he's a popular president who wins a second term or an unpopular one who gets ousted, markets tend to ride the public's postelection euphoria and lock in gains for the year, Hirsch says.

But Hirsch cautions investors to be selective. Like Barker, he foresees other cyclical forces exerting a destabilizing influence, at least temporarily, such as the seasonal trend for market declines in the late spring and summer. He also notes that markets have been rallying since October; they could be due for some retreat in the months ahead. Investors who get in too late or out too soon could find themselves harvesting losses for the year.

"It's not just, 'Go long in everything in election years,' " Hirsch says. "You're going to get a little bit of a gain. I think you can be comfortable staying in [stocks]. But to come in right now, I think you need to consider what you're buying and not just jump into the market blindly and broadly."

Some investment pros are keeping election-year dynamics in mind but not betting the farm on them. Guy Hatcher, a financial planner and private money manager in Southlake, Texas, says his clients are still smarting from the market's nose dive in the last election year. Since then, most have reduced their exposure to equities to somewhere between 30 and 50 percent; hardly any have more than half their portfolios in stocks now. They're relying on AAA-rated, intermediate-term bonds (five-year terms or less) for portfolio stability.

"There are some patterns [in election years] so that maybe you can make some modifications" and buy on seasonal softness if you're an aggressive investor, Hatcher says. "But most of the [clients] are saying, 'This is such a different election year, we don't know if any of that is going to play out.' "

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