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Warning issued for second and third quarters

- 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.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Rags to Retirement (Alpha Books)." You can e-mail them at MWliblav@aol.com.

To read more columns, please visit the column archive.

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