Since working off its early year correction, the U.S. stock market has been on one of those inexorable runs that we’ve seen on so many occasions in recent years. Such runs have seen the market essentially steamroll any and all potential pitfalls that may arise. This recent run has been no exception as the stock rally has basically remained bulletproof to any exogenous hazards (real or fake). But just when the market is on this roll, even breaking out to new highs and apparently incapable of going down, a bout of selling strikes, seemingly out of nowhere. However, if we look a little deeper, perhaps we shouldn’t be surprised by the recent weakness.
The Presidential Cycle refers to the pattern of behavior in stock prices throughout the four years of a presidential term. Specifically, stocks tend to be strong during certain periods of a president’s term and weaker during others. And while there are many factors influencing stock prices during a particular period of a particular presidential term, the cycle has been one of the more historically consistent seasonal patterns.
This may be relevant to the current weakness because, on average, the worst performing month of the cycle, historically, has been September of year 2, i.e., the current month.
As the chart shows, since 1900, September of year 2 of the Presidential cycle has returned an average of -1.43%, slightly worse than September of year 3, February and September of year 1 and May of year 4.
Again, there are many factors that determine the market’s return in a particular month. And returns for a particular month in a particular year will not always match its historical average. That’s what makes an “average”. But to the extent that any month of the cycle can be relied upon to be weak, it is this September of the 2nd year of the Presidential cycle.
But just how reliable is it? And does the market’s recent level of conformity to the historical cycle enhance the pattern’s reliability? And to the extent that it does, what does it imply about the market’s potential path going forward?
In a Premium post at The Lyons Share, we discuss the current year’s performance relative to the historical pattern – and what it may portend following the current weakness.
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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
The SPDR Dow Jones Industrial Average ETF (DIA) closed at $259.54 on Friday, down $-0.75 (-0.29%). Year-to-date, DIA has gained 5.79%, versus a 8.20% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.