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.
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.
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.
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?