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After the Dow's 13,000 milestone, stock lore taunts investors

By Ron Daparma
Thursday, April 26, 2007
 

For nearly seven decades, stocks have done well in the year before a presidential election, so there's good reason why the Dow Jones industrial average could go higher after shooting beyond the 13,000 mark Wednesday.

But there's also an old stock market adage that says, "Sell in May and go away," that could cause some investors to think it's time to cash in their investments and run for cover after April's run-up in stocks.

So, what's an investor to do after the Dow closed at 13,089.89, up 135.95 or 1.05 percent?

Pay attention to history, but let good old investment fundamentals be your guide, local investment advisers and experts said yesterday.

"I don't pay attention to benchmarks," said nationally known money manager Ronald Muhlenkamp, head of Muhlenkamp & Co. in Marshall, when asked about the Dow's climb to new heights yesterday. "There are two factors that impact the market, value and human psychology, and I have no skill in human psychology," he said.

When the Dow broke 13,000 early in the day, Muhlenkamp said, he didn't start getting dozens of calls from giddy or worried investors.

Neither did Brian Koble, senior research analyst at the office of Hefen-Tillotson Inc., Downtown.

"I think that most investors who have had experience in the market during the last decade know that investing in the markets is a long-term process, and they don't get overly excited or overly depressed based on short-term market performance," he said.

Still, there are statistics that back up time-tested theories about the market.

For example, 1939 was the last time the Dow Jones industrial average posted a negative return in a pre-presidential election year, according to the Stock Trader's Almanac. The theory for such a pattern is that presidents generally do as much as possible to stimulate the economy as their current terms in office are drawing to a close, experts say.

In contrast, former Bloomberg stock columnist John Dorfman says there is at least some basis for giving credence to the "Sell in May and go away" adage.

"For the past five decades or more, the months from May through October have often been flat, or close to flat, for U.S. stocks," Dorfman noted. "The market makes most of its gains from November through April," he said.

"Taking a $10,000 investment starting in 1950, an investor reinvesting proceeds would have gained only $341 in the worst six months of every year through April 12, 2007," said Jeffrey A. Hirsch, the Almanac editor-in-chief. "Investing that same $10,000 in the best six months, he or she would have gained more than $556,000, he said.

While such historic patterns may bear watching, local experts including Tim Lynch, a vice president at the Downtown office of Janney Montgomery Scott Inc., put more weight on such things as company earnings, which have helped propel the market's gain from 12,000 to 13,000 in just six months, since Oct. 18, 2006. About two-thirds of U.S. companies so far this earnings season have reported results that were in line with or higher than analyst expectations.

Also important are such things as the near-term outlook for the slumping housing market and in what direction the Federal Reserve may take interest rates -- up in case its members are worried about inflation, or down if they believe the economy needs an extra boost, Lynch said.

"My gut feeling is the next rate change will be down, but a lot of people say it will be up," he said.

Because investors generally are advised to keep a balanced portfolio that might include a mix of individual stocks, mutual funds and bonds, it may not be wise to make snap decisions based on market milestones like the Dow's exceeding 13,000, Hefen-Tillotson's Koble said.

That's advice that Jennifer Wylie-Faines, of McCandless, can agree with. Although she took note of the Dow's record yesterday, Wylie-Faines didn't jump on the phone to call her broker.

"Of course, I'm glad to see it," said Wylie-Faines, public relations director with the Dymun + Co. advertising and public relations firm, Downtown. "It's a big milestone, but I think there's a lot more important things to look at such as the strong earnings that fueled it."

 

 
 


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