Stock Market Cycles - 02/01/24

Chart of the Day: (02/01/24)

Presidential Cycle

• Many investors study stock market cycles, an attempt to measure observed phenomena in financial markets which lead to recurring patterns. These cycles reflect the natural ebb and flow of investor sentiment, economic conditions, and other factors that influence the pricing of securities. While not perfectly predictable, the recognition of these cycles is a widely accepted concept in finance.

• I’ve always felt that markets can be influenced by unexpected events, and cycle analysis is too vague to provide accuracy in predicting future market movements.

• However, since financial markets are driven by people, the most recurring patterns that I have found useful is the four year presidential cycle, attributed to a combination of economic policies, fiscal measures, and the desire for incumbents to boost economic conditions leading up to elections.

• Today’s chart was built by All Star Charts. I’ve always thought it a funny name but perhaps it is apropos given we are heading into NHL All Star Weekend. But I digress. And this observation is somewhat useful, and it coincides with my Outlook for this year.

• Since 1952, the S&P 500 has averaged a 7% during U.S. presidential election years. While a 7% gain is far from disastrous, it below the roughly 10% average annual total return for the S&P 500 in a typical year. Of course, it's important to remember that past performance does not guarantee future returns, and there have only been 17 presidential elections since 1952.

• In years where the incumbent is re-elected, the S&P 500 has not declined since 1952 and has averaged a 12.2% annual gain.

• If you look at the chart, you’ll see that in every US Presidential election year, the market typically goes sideways to down from here, bottoming in Mid-March before a strong final three quarters. This is my current expectation.

• Our Chart of the Day is intended to be a standalone technical chart. 

• We use them to highlight open positions, stocks on our watch list, or indicators that we believe are important, or just interesting at the time. 

• It is not a directional market call.