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Stock Market Watch: Are Investors Forgetting Its An Election Year?

The May jobs report seemed to be yet another data indicator in a whole series of data indicators over the past month that the economy is slowing but are investors also forgetting its an election year?

Specifically, Lee Munson, the author of Rigged Money and the CIO at Portfolio, LLC, recently went on Yahoo! Finance's Breakout program to remind investors that we are in an election year and he cited historical data that indicates the weakest months leading up to a presidential race are the months of April and May while the strongest months are June, July and August. In other words and historically speaking, the stock market heats up in the summer of an election year.

However, another rally seems far off given that the major US indexes are now approaching the point of giving up all of their gains for 2012. Specifically, the Dow Jones Industrial Average went in the red last Friday while the S&P 500 is just 1% away from turning negative and Nasdaq still 5% higher for the year.

On the other hand and as we noted in an earlier post (Stock Market Watch Starting May 1: A Wrap-up of This Year's "Sell in May and Go Away" Advice), Frank Holmes, the CEO and Chief Investment Officer of US Global Investors, had pointed out that since 1972, the stock market has rallied in 5 out of 8 election years since 1972 with market gains of 12-26% with the exceptions being recession years like 2000 and 2008.

Moreover and in theory, the reason for stock market gains during an election year is that the President (in theory) will want to ensure that all of the bad news is out of the way long before there is an election. Hence, the stock market is free to rise. Given that gains or losses in the Dow during the two months just before the election will mean a win or a defeat, respectively, for who ever the incumbent is nearly 90% of the time, there is plenty of incentive to do what ever it takes to prop up the stock market.

So what kind of stocks should investors and traders alike be looking at? Munson believes that June is going to be the time to get in the stock market to buy into a "very nice" pre-election summer rally but he also cautions that fundamentals are just as important and that investors need to pay attention to the labor market's slow growth. Hence, he advices investors to avoid stocks that have anything to do with Europe and to stick with the S&P 500.

Finally and as we enter an uncertain summer before the next election, be sure to keep checking for the latest predictions about the stocks you trade along with our My Portfolio screen where you can easily keep track of your trading or investment portfolio.