Bad Time To Invest?

by Alan Lavine and Gail Liberman

Just when the stock market starts looking attractive, one leading market watcher warns it’s best not to invest in stocks in the second and third quarters of this year.

      Reason: A presidential administration’s second year in office historically has been a bad time to invest.

      Sam Stovall, Standard & Poor’s chief investment strategist, analyzed the performance of the stock market during the 16 quarters of a presidential administration over the past 60 years. The research showed that, on average, the second and third quarters of the second year of a presidential administration produced the worst returns in the S&P 500. The S&P 500 is an index of 500 large companies traded on the New York Stock Exchange.

      The average return in the second quarter was -2 percent. In the third quarter, the return averaged -2.2 percent.

      “Because of historical performance of the second and third quarters, the second year of an administration tends to be the worst performer of the four year cycle,” Stovall says.

      Fortunately, the stock market tends to bounce back. Stovall found that the fourth quarter of the presidential administration’s second year and the first quarter of the third year each averaged about 7.5 percent.  

      So what should mutual fund investors do? The answer: Nothing special!

      Although this study is interesting, there are drawbacks.

• Why should you sell good stock funds that you want to own for the long term just because of a few bad quarters of performance? You’d have to pay capital gains taxes on your profits.
• It’s not a good idea to try and time the markets. What if you sell, and there is an aberration, like the market happens to go up?
• If the Standard & Poor’s research is on target, why not just use a pull back in the market to accumulate more shares of stocks you own? This can help lower the average overall cost of your investment. Then, consider selling at the higher price later on.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.