by Archie M. Richards, Jr., CFP^®
August 2, 2004

For six months, the stock market has gone no where or down. Allow me to brighten your day.

During the 104 years from the beginning of 1900 until now, the United States has had 26 presidential elections. From January to May of each of those years, the Dow Jones Industrials lost an average of 0.75 percent. But from June to December, the Dow gained 11 percent.

We're now in the last half of a presidential election year.

Moreover, during three of the presidential terms (the ones ending with election years of 1924, 1964, and 1984), income tax rates were cut significantly. In the last half of those election years, the Dow advanced considerably more than 11 percent.

During the current presidential term, income tax rates were cut significantly. I hold to my prediction that the Dow will reach 12,300 by the end of 2004. Not counting dividends, this would be a gain of 21 percent from the Dow's level at this writing of 10,129.

A recent Wall Street Journal article said that "a surprising number of top-ranked money managers are accumulating piles of cash in their portfolios. For example, Robert Rodriguez, manager of the FPA Capital Fund, is quoted as saying, "The investment landscape with stocks and bonds is now a vast wasteland." Mr. Rodriguez has moved 37 percent of his fund into cash, a 20-year high.

You might think that big-time money managers have their fingers on the pulse of the economy, with an unerring feel for the market. They don't. They probably know better than the rest of us what has occurred. But the future is a different story. Most of them are no better than we are about the future. They're too close to the minutia of what's happening. They see all kinds of trees, but the forest eludes them. Group-think prevails. When investors are pessimistic, money managers generally are too.

Money managers have good reason to follow the investment herd. Let's say that most people are bearish, but one money manager is bullish. He buys heavily and proves to be wrong. Having stuck out in the crowd and been wrong, he loses his job.

Alternatively, let's say that most people are bearish, but so are all the money managers. They're all wrong. Therefore, no one sticks out, and no one loses his job. Money managers have a strong personal interest in following the herd.

The herd is usually wrong about market predictions. The more pessimistic people are, the more likely the market will rise. Investors and money managers do not turn optimistic and then buy stocks. Instead, sentiment parallels stock prices. People are most pessimistic when stock prices are at their lows. The prices can always go lower, and people can become even more bearish. Investors today are not as bearish as they were after the September 11 attack or again in March 2003. But, as mentioned, we're in the last half of a presidential election after a significant cut in tax rates. The next major market move, in my humble opinion, is up.

Economic indicators also point higher. For over 70 years, the American Institute for Economic Research has done a highly creditable job tracking U.S. business cycles. (See americaninvestment.com or write to P. O. Box 1000, Great Barrington, MA 01230-1000.)

The Institute tracks 12 economic indicators that generally move in advance of the economic cycles. Every one of them is bullish.

The Institute tracks 6 indicators whose fluctuations roughly coincide with economic cycles. Every one is bullish.

The Institute tracks 6 indicators whose fluctuations lag behind economic cycles. Only one-third of these are bullish. The other two-thirds continue to reflect the economic downturn that ended 3 years ago. The next economic downturn is unlikely to start until the lagging indicators recover from the last one and turn bullish.

The current bull market isn't over yet - not by a long shot. If you get caught up in the current pessimism and sell, you'll be sorry.