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Laying Out Our Strategy for the Second Half of 2012

Politics, Europe, and the Fed are critical factors to consider

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4. The Presidential Election: We’ve talked about the election before, but when looking ahead to the second half of this particular year, we have to mention it again. Presidential elections are historically very good for stocks. Going back to 1950, the S&P 500 has moved higher over the last seven months in 13 of the last 15 Presidential election years, according to the Stock Trader’s Almanac. That’s 87% of the time. Below is a chart going back even farther from Bespoke, showing the strong S&P 500 returns in elections years going back to 1928:

As you can also see, the pattern is playing out once again this year. Another consideration: Politics aside, Wall Street considers Republican candidates more business friendly, so if the race is tight or Mitt Romney moves ahead of President Obama in the polling, we could see even more enthusiasm for stocks.

Going After Growth We Can See

Next week, we’ll begin the second half of the year with what has become all-too-familiar summertime volatility. It can be unsettling, I know, but we’ve been here before, and there is a strong chance we will finish the year with equally familiar strength, especially with the additional catalyst of the election.

That’s why I’m excited about the rest of 2012. Yes, the volatility will likely be with us a little while longer, but we know from experience that volatility produces excellent buying opportunities. Our job is to go after the best of those opportunities. I think back to last summer when we were in the throes of a volatile market and we added innovative leaders like Panera (NASDAQ:PNRA) and Novo Nordisk (NYSE:NVO), which went on nice runs to finish the year 23% and 6% higher as the S&P 500 gained a little over 3%.

This year, growth may be uncertain for the economy as a whole, but there are again companies out there thriving despite and even because of the current environment. We’ll focus on those with a high degree of earnings visibility, meaning we can see pretty clearly the growth that is on the horizon over the next couple of quarters as well as longer term. In other words, companies that are in an excellent position to grow even if the economy continues to struggle.

I do want to mention that we may pay a higher valuation for some of these stocks than we would in a more “normal” environment. That’s the price for a higher degree of certainty, but it’s worth it. Many companies with very rich multiples, such as a relatively high P/E ratio, are doing very well right now. Solar Winds (NYSE:SWI) and Cerner (NASDAQ:-CERN), which both netted us solid profits in the first half of the year, are two excellent examples. That’s not to say we won’t consider valuation closely. I always do.

It’s just not the most important factor in the current environment.

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