Election year may not be good to investors

updated 1:55 p.m. ET Jan. 9, 2008

NEW YORK - Presidential elections typically are prosperous times for investors. The Standard & Poor's 500 stock index has risen in the final seven months of 13 of the last 14 presidential election years, according to the Stock Trader's Almanac.

Those are odds anyone in Vegas would welcome, but this year's uncharted credit mess makes a repeat performance far from guaranteed.

For much of the last half century, stocks have typically bottomed two years into a presidential term, then rebounded in the third year and rallied again in the actual election year.

Some of those latter cycle gains have come because incumbent administrations want voters to be happy when they head to the polls, so they "shamelessly attempt to massage the economy so voters will keep them in power," said Jeffrey Hirsch, editor of the Stock Trader's Almanac.

This cycle has proved different so far. Stocks, as measured by the broad-market S&P 500, rose in 2005 and 2006, but then barely eked out a gain in 2007, climbing only 3.5 percent after big losses starting in October dragged down the index.

Now, as the intensity of the presidential campaign ramps up, serious headwinds are threatening to push the economy into a recession, which is putting stock investors on edge.

Home prices in many of the nation's biggest cities are falling at record levels, while subprime borrowers are defaulting on their home loans at alarming rates. That has led to tighter credit conditions, with businesses and consumers facing more hurdles to obtaining loans than in the recent past. Companies have also had to accept lower prices when selling risky debt.

At the same time, manufacturing production is coming in at a much weaker-than-expected pace, and consumers have begun to show some fatigue, as evidenced by the disappointing retail sales tallied during the holiday season.

Things could get even worse in the months ahead because employers are growing more wary. Employment at private companies actually declined last month and the unemployment rate surged to a two-year high of 5 percent from 4.7 percent in November, figures from the Labor Department showed. Nomura Securities economist David Resler called the jump "alarming" because "single-month increases that large occur only rarely and most often near business cycle turning points."

Such news started investors' year off on a bad note. The first three days of trading saw a 3.86 percent decline in the S&P 500 _ the second worst start ever, according to the data-trackers at Bespoke Investment Group.

Whether that sets the tone for the rest of the year now depends on how many things shake out. Most worrisome to investors are the unknowns related to the housing and mortgage market malaise. If credit standards remain tight, and the financial industry continues to be plagued by billions of dollars of losses on their subprime and other debt assets, this presidential year might not turn into a winner.

"Once there is some indication of where the bottom of the credit crisis might be, then the stock market will become more comfortable going forward, but not until then," said Marshall Nickles, an economics professor at Pepperdine University's Graziadio School of Business and Management who has studied presidential election cycles in the stock market.

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