Do Stock Market Cycles Influence Your Investing Behaviour?

Just as nature abhors a vacuum, people hate randomness … I call this tendency the predication addiction.  Jason Zweig “Your Money and Your Brain”

We all know about the economic cycle, the natural fluctuation of the economy going from growth, peak, contraction and trough.  It looks like the bell curve you’re familiar with from school.

Being familiar with where we’re at in the economic cycle can assist us in purchasing our investments.  During times of expansion, investors seek to purchase companies in capital goods, technology and energy.  In times of contraction shares in utilities, financials and health care are usually a good buy.

Related: Why You Should Own Bank And Utility Stocks 

There are also stock market cycles that various people have tracked over the years.

The Presidential Cycle

This cycle refers to the action of the stock market in the four years of an American president’s tour of duty.  The theory is, as the election draws near, the administration does everything they can to stimulate the economy so voters go to the polls with jobs and a feeling of economic well-being.  This results in interest rates being generally lower and a strong stock market.

Since 1948 markets have gained in every election year except 2000 and 2008.

Related: Can We Fix The Economy?

The stock market benefits especially in the third and fourth year of a term.

The Decennial Cycle

In 1939 Edgar L. Smith observed that the different years of each decade show strength and weakness according to a pattern.  Years ending in one, two and seven (e.g. 2001, 2002, 2007, 2011 and 2012) tend to be weak years in the stock market.  Years ending in three, five, six, and nine tend to be positive years.

Years ending in two (2012) often set-up good, strong bull markets.

Seasonal Cycles

The stock market has a tendency to have stronger growth on average in the winter than in other months.  You pick a basket of stocks and buy at the beginning of November and sell them at the end of April.  The old saying, “Sell in May and go away” refers to this recurring phenomenon.

The Christmas rally is another seasonal pattern.  Retail sales peak from September to December, and then decline after the holidays in January and February.

What Does This Mean For Investors?

It’s interesting to note that this year the decennial pattern is in direct contrast to the presidential election cycle.  Trying to figure when to buy low and sell high can be very tricky.

All of these cycles are statistical averages over many years.  Since the markets don’t follow identical patterns every time, they are more like guidelines than rules.  It’s not clear what ordinary investors should do.  We just do the best we can and hope we don’t make any serious mistakes.

Related: Why Do Certain World Events Spark Totally Irrational Behaviour?

Perhaps we should have sold in May (seasonality), look for the bottom this year (decennial) and buy back in five or six months in the hope that the market will go up (presidential).

Do you take notice of these stock market cycles when investing?  What do you do if they seem to contradict each other?

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  1. krantcents on June 27, 2012 at 9:46 am

    I never tried to time the market. I dollar cost average into the market monthly as I am paid. In fact, I just read that if you consistently pick the same day each month, you do better than the alternatives.

    • Boomer on June 27, 2012 at 11:38 am

      @krantcents: So in fact you are making your own cycle.

  2. Ken Faulkenberry on June 27, 2012 at 1:22 pm

    Cycles are always interesting but difficult to maneuver because they are always changing. The best cycle to pay attention to is valuation. Historically, stock appear go in long term cycles of overvaluation to undervaluation and then back again. Investors can increase their long term returns substantially by being aggressive during period of undervaluation and conservative in periods of overvaluation. Price matters!

  3. Roger Wohlner on June 27, 2012 at 6:05 pm

    Great post, I enjoy reading about cycles and trends of this type. Invariably it seems that when one has this all figured out the markets decide not to cooperate. I believe one should invest based upon their financial plan and rebalance to that plan on a regular basis as warranted. I also believe that the financial plan should be reviewed and reevaluated on a periodic basis and adjusted based upon changes in one’s circumstances/situation.

  4. Udell Tivis on July 2, 2012 at 11:13 pm

    There are a number of stock market cycles that investors track over the years, including presidential, decennial and seasonal cycles.

  5. John Schmertz on October 4, 2012 at 9:58 am

    Thought you guys might be interested in this site. Has a number of charts looking at long term market cycles from different angles:

  6. Simon on October 5, 2012 at 1:23 am

    I think it is important for investors to know the cycles of the stock market, not only because it affects their investment, but to also remind them that short term investing is actually speculative in nature. Warren buffett has always preached to do long term investing, and I think prudent investors should not forget this.

  7. Bob Baker on November 1, 2017 at 9:25 am

    I like Valuation cycle the best – sooner or later it will fall if in overvaluation ( like now) and in 2008.Technical analysis charts plus macro news awareness are best to watch and make a decision. Better to be wrong in being early out by scaling down than late and selling into a rapidly losing market. One can always correct a mistake and this is not about day trading. Remember, in 2008, market took about a 50% hit quickly and that requires a 100% return to get back to break even!

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