“The Ides of March and the Summer of Discontent”

If you take a look at recent history, the mid-term of the election cycle is the most dynamic year for the market on average. While the annual returns do not appear that special, the monthly data explains the title. The new year brings weakness in January and February, followed by a rally into March prior to an early and deep correction over the summer setting up the October bounce that continues until the following summer. The chart below shows the average monthly progression on the Russell 2000 index during the mid-term election cycle since 1980.

On average, by mid-March the market is topping and the summer provides the deepest correction of the four year cycle.   The discontent ends with the end of summer. Similarly, we have another chart showing the average daily progression of the S&P 500 during the mid-term election during the last five cycles.

Since 1950, the average mid-term spring peak has occurred mid-April. During the last five cycles, the S&P 500 mid-term spring peak has averaged mid-March with the real correction beginning toward the end of April. The mid-term summer correction sets up a tremendous bounce back that continues until the following pre-election year summer. How convenient for the incumbents to go on the campaign trail with such positive economic spirits.

The question always is, will the cycle hold this time. If past cycles have been driven by short-term monetary-fiscal policy, what happens in the current environment of chronic ultra-loose and ultra-aggressive monetary policy and with the “fiscal restraint” being talked up in political circles? Recent history has shown the bear markets cannot be stopped by loose monetary policy only delayed. I have no doubt a deep correction would reverse the fiscal restraint talk and give the Fed another excuse to delay tapper setting up my double top.

While I do expect a good market correction this summer the real question is about the follow-on rally. Will the pre-election year surge be a continuation of the bull market or a double top that commences the bear market? Or will this summer’s correction break with history and commence the bear market. I do not have a crystal ball, merely conjecture.  I lean toward a deep correction and the double top.

Written and edited by Michael H Bond for Almanac Smart

Categories: Seasonal Perspectives