The Calendar Is in Investors' Favor
02/21/2013 12:32 pm EST
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.
- Read Howard’s 2013 predictions about the market and the economy at MoneyShow.com.
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|pagebreak|
Hirsch tracked the performance of the Dow over all the presidential election cycles since 1833. The pre-election year (third year of the cycle) is historically the strongest, with an average 10.4% gain. The election year itself comes in a distant second, with an average 5.8% advance. The midterm year records an average 4.2% rise and the post-election year a 2% average increase since 1833.
Why? Because the president and Congress usually boost spending before and during the election year to win brownie points with voters. Conversely, the piper usually gets paid in the post-election year, and both parties take whatever pain they’re capable of accepting.
- Read Howard’s piece on what government should and shouldn't do at The Independent Agenda.
The current presidential cycle is a bit out of whack, because of the financial crisis and its aftermath, the election of the Tea Party-dominated House of Representatives in the 2010 midterm election, and the Federal Reserve’s loose monetary policy.
But these big events have not necessarily short-circuited the usual patterns. The much-feared “fiscal cliff,” which pundits fretted about endlessly late last year, turned out to be a non-crisis, as this column predicted.
- Read Howard’s piece on why investors shouldn’t obsess over the fiscal cliff at MoneyShow.com.
So, now we have some new hurdles—automatic spending cuts kick in March 1, and a continuing budget resolution runs out in late April. But Republican leaders like Rep. Paul Ryan have said there will be no default and no government shutdown. So what’s everybody worried about now?
To be sure, the end of the payroll tax holiday and the automatic spending cuts—if they really happen—may cut GDP growth by one percentage point or so this year. That’s not great, but it’s no disaster, either.
And then you have the Federal Reserve. Whether or not it continues its massive bond-buying program, real interest rates are still negative, and Ben Bernanke is unlikely to raise short-term rates in what’s expected to be his last year as chairman. Fed policy, said Hirsch, is “just an open spigot. That’s why my forecast is more bullish initially.”
After a typically quiet February, Hirsch expects the market to rally again in the spring and take out the old all-time highs in the S&P and the Dow—but not by a lot. Then comes the weak six-month period from May through October, where we could have a pullback. But after that, seasonal patterns suggest an end-of-year rally that will put 2013 in the black.
“I’m not fighting the tape, I’m not fighting the Fed, I’m not fighting the bull here,” Hirsch told me. But he warned that “if we don’t get a bear market...this year, the chances are higher that we’ll get it next year,” in what he called “a typical midterm bottom.”
“You have to believe this market won’t go up forever,” he said. And indeed it won’t. So, investors should enjoy the ride while it lasts.
Howard R. Gold is editor at large for MoneyShow.com and a columnist at MarketWatch. Follow him on Twitter @howardrgold and catch his coverage of politics and the economy at www.independentagenda.com.
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