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.
Apart from that, millions of investors are still trying to discover a formula for timing the stock market by finding patterns. But, in any set of data it’s possible to find patterns in just about anything, if you look long enough.
Here are 4 stock market cycles that various people have tracked over the years.
It is said that the stock market’s most positive returns and strongest growth is between November 1 and April 30.
The old saying, “Sell in May and go away” refers to this recurring trend.
The Christmas rally is another seasonal pattern. Retail sales peak from September to December, and then decline after the holidays in January and February.
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 that the US stock markets are weakest in the year following the election of a new US president. Then after the first year, the market improves and is the strongest in the 3rd and 4th year of the term, until the cycle begins again with the next election.
The experts have also found that the stock market has performed better under a Democratic president.
The Decennial Cycle
The Decennial cycle refers to a ten-year cycle in stock markets. Way back in 1939 it was observed that the different years of each decade show strength and weakness according to a pattern. Years ending in three, five, six, and nine tend to be positive years. Years ending in one, two, and seven tend to be weak years in the stock market.
The “not so lucky 7” theory states that the stock market will crash in years ending in “7.” Two events that support this phenomenon include the crash of 1987 (aka Black Monday) and the Asian financial crisis of 1997.
The Super Bowl Predictor
Is the winner of this year’s Super Bowl a reliable predictor of how the stock market will perform for the rest of the year?
There is a long and complicated history of the Super Bowl theory that boils down to this:
If a National Football Conference (NFC) team wins the Super Bowl, then the Dow Jones Industrial Average (DIJA) will rise. If an American Football Conference (AFC) team wins, the index will fall.
According to the Wall Street Journal, this phenomenon has an amazing 82% success rate.
The New York Times reversed the prediction. Instead of using the Super Bowl to predict the stock market, why not use the stock market to predict the Super Bowl? It reported that, if the Dow increases between the end of November and the time of the Super Bowl, the football team whose city comes second alphabetically usually wins.
There are a lot of people who take this seriously.
The bottom line
It’s not surprising that investors and computers can discover rules that explain the past remarkably well but are unsuccessful in predicting the future.
With 20/20 hindsight, let’s look at 2017. This was an “unlucky number 7” year, the first year in office for Republican president Donald Trump, and the AFC New England Patriots won the Super Bowl. These indicators point to a very bearish stock market.
However, we know that the US markets went on to enjoy the best annual performance since 2013, all gaining in the double digits. The TSX lagged the US somewhat, but still had a modest overall increase.
So, the bottom line is – don’t waste time looking for patterns or trying to time the stock market.
Instead, develop a personal investment plan – and stick with it.