By Ned MONTAG, CEO
By Many activities in the natural world are strongly influenced by cycles, primarily the 24-hour and 365-day intervals. Pick a date well into the future, ask a naturalist to predict the behavior of the plants and animals under study, and it will be done with remarkable accuracy. How convenient it would be if investors could do likewise: predict the vitality of the stock market and stock pricing solely based on dates on the calendar. Well, as it turns out, they can, within solid limits.
There Are Two Primary Stock Market Cycles:
Market researchers have discovered the presence of two cycles that clearly influence stock prices.
Sell in May and Go Away
The first and best known to professionals is an annual cycle summarized by the phrase “sell in May and go away.” First popularized by investment writer Yale Hirsch in his 1968 edition of the Stock Traders’ Almanac, the research shows that, on average, all of the returns that stocks produce compared to bonds and other fixed income happen during the cold weather months of November through April. On average, the stock market performs no better than fixed income during the warm weather months of May through October. To put a number to these findings, since 1950, the stock market has averaged a return of 6.9% during the November through April period, but only 1.7% during the balmy months of May through October.
Investors owning stocks in tax-free accounts such as IRAs or foundations might use this knowledge to modify seasonally their equity exposure in line with these tendencies, although doing so in taxable accounts could interfere with the preferable treatment of gains on stocks held continuously for more than 12 months.
The Presidential Cycle
The second cycle is far more obscure. It is a four-year “presidential cycle”, and it predicts that the best time, by far, to own stocks during any president’s (Republican or Democrat, it matters not) term is starting in October of a president’s second year and ending in April of the third year. Typically, the returns on stocks during the first 20 months of any presidency, on average, are subpar, but in October, Year 2, the cycle kicks in and investors make all of their excess equity for the four-year term during the following seven months. This may sound far-fetched, but over the last 19 presidential terms dating back to 1932, the stock market has produced annualized gains net of inflation of 28% during this recurring seven-month period, while the other 41 months of any presidency have averaged annualized returns of only 4%.
Market analyst/guru Jeremy Grantham pegs the odds that this phenomenon is just simply random luck at less than one in a million. Some recurrent element (probably runaway government spending) is triggering this recurring behavior.
During the Biden presidency, this cycle (and the spending packages) showed up right on time. Although the stock market was in a bear market decline during the first half of 2022, the S&P 500 Index bottomed right on cue on September 30, 2022, and then rallied 16.5% through the end of April. A 16.5% gain in 7 months annualizes to a 28% rate, right on target with historical norms.
Students of the presidential cycle, including Ned Davis Research, note that the tendency for the stock market from here is to churn in a sideways trend until the spring of Year 4, after which it tends to rally into the presidential election. This makes some sense since what investors crave more than either Democrats or Republicans is clarity, and once investors can begin to predict the likely outcome of the fall election, they tend to invest. Whether this pattern actually holds for the rest of the Biden presidency remains to be seen.
MONTAG Wealth Management In Atlanta
At MONTAG, we invest based upon our understanding of client investment objectives, and match that to the prospects for individual companies or sectors within the broad economy; not based on dates on the calendar. Unless an investor has a tax-free account, it is harder to accumulate wealth while
dodging in and out of the market and incurring taxes in the process. Wealth has long been reliably accrued by buying good, durable companies that grow, and then holding them through thick and thin.
It’s a complicated endeavor but we very much enjoy it and appreciate your business.
The information provided is for illustration purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. MONTAG employees do not provide legal or tax advice. For specific legal or tax matters, you should consult with your own legal and/or tax advisors.
