Although the year after a presidential election is generally the weakest for stocks, other even more predictive indicators are flashing positive, writes MoneyShow's Howard R. Gold, also of The Independent Agenda.
As both the Dow Jones Industrial Average and the S&P 500 hover near all-time highs, and other key indices have surpassed their peaks, individual investors have jumped into US stocks again for the first time in years.
Those events have prompted some pundits to get more cautious. But one long-time tracker of market trends has a word of advice: Relax.
Jeffrey Hirsch is editor in chief of the Stock Trader’s Almanac, founded by his father Yale. The Almanac specializes in seasonal trading patterns, which Hirsch tracks over decades.
The two most important trends, he says, are the annual six-months-on, six-months-off pattern and the four-year presidential cycle. The six-month pattern recommends buying stocks around Halloween and selling in May. The presidential election cycle identifies the likely best (the third year after an election) and worst (the post-election year) years for equity performance.
This year, Hirsch expects a strong annual seasonal pattern to trump the historically weak post-election year and give the S&P 500 a positive return in 2013.
That’s a change from the more cautious stance he took when he put together the 2013 Almanac in the middle of last year. “I’m not as bearish as I was. Right now, [it looks like] we’ll have a typical seasonal year and a mild post-election year,” he told me.
His best case is that the economy will continue to grow modestly and the S&P will advance 5% to 10%. (It’s up 6% as of Wednesday’s close.) The worst case: The “wheels come off” and we get a genuine bear market where stocks fall 20% to 30% from their peak.
“I’m not anticipating [what] I feared earlier on,” he told me. “I’m not convinced that we’re going to get Ursa Major.”
Or maybe not even Ursa Minor. Why not? Because the market’s performance so far suggests 2013 will be a good year.
First of all, the January Barometer has been a remarkably accurate predictive tool since Yale Hirsch created it in 1972. The Barometer states that as January goes, so goes the S&P 500. Indeed, according to the Almanac, “the indicator has registered only seven major errors since 1950,” for a 75.8% accuracy ratio.
And then there’s the “first five trading days” indicator. Advances by the S&P in January’s first five days “preceded full-year gains 84.6% of the time,” Hirsch wrote. The S&P was up 5% last month, and gained 2.2% in the first five trading days of the year.
Also, a positive January performance can counteract the generally weak post-election year. “Full years followed January’s direction in 12 of the last 15 post-presidential election years,” the Almanac wrote.
NEXT: How Stocks Perform in the Post-Election Year