Broker Check

The Weekly Update for 6/14/2019

| June 15, 2022

The Wicked Witch is Dead…Revisited

If you are a long-time client, you will likely recall a letter I sent on October 28, 2002.

I titled it “The Wicked Witch is Dead”, as I was writing about the end of the “Tech Wreck, which started March of 2000 and ended with my letter to clients in October 2002.

Some data points from the Wicked Witch letter focused on the fact that investment markets tend to move in cycles.  Three notable cycles are the Annual Cycle, Four-year Presidential Cycle and the Ten-Year Cycle.

  1. Annual Cycle: There is a simple analysis of an annual cycle in stocks by Yale Hirsch (Stock traders almanac) that goes back to 1950 and shows that stock performance in the six-month period between November and April as being superior to the six-month period between May and October.  Why is this a good annual season for stocks?  There is institutional tax selling in September and October for reducing tax exposure (selling losers to offset the gains of your winners) and then buying back again toward year-end to re-establish the same position.  Other possible explanations are investment of year-end bonuses and dividends paid at year-end may be reinvested.  In addition, tax refunds and new retirement plan contributions are invested January through April each year.  Combined, these add a lot of investor buying power (demand).  The months of November through April don’t always prove to be the exact best, but overall, according to this study, the difference is a measurable plus.
  2. Four-Year Presidential Election Cycle: There is a four-year Presidential Election cycle that is surprisingly consistent over time.  Ned Davis Research, Inc. provides statistics based on the data from 1/6/1900 to present showing that, on average, the stock markets tend to be down from late in the first year of office into late the second year or mid-term election (2017and 2018).  Then, historically, there has been a strong rally from late in the second year until late in the third year (late 2019).  Just like the increase in values we have seen year-to-date since the lows of 12/26/2018!  In year 3, the President is trying to lay the groundwork for re-election, at least the re-election of the party.  This tends to come with more promises and “feel good” programs.  Year 4 (2020) is the actual election year, so the public starts watching to see which party might better help their pocket book.  Historically, year 4 has been somewhat flat to slightly up.
  3. The Ten-Year, or Decade, Cycle: There is a ten year, or decade, cycle in stocks that is even more powerful for creating effective investment strategies.  Ned Davis Research, Inc. has also done research on this cycle back to 1900.  The results are very insightful.  The history of this cycle has shown that advances and economic booms in most decades tend to be followed by consolidations of such gains in the early years of a new decade.  The markets tend to be down from the 0 year into the 2 year, then rebound modestly in the 3 and 4 years, typically offsetting the down turn of the 0-2 years.  Then most of the net gains are made between the 5 and 9 years when, since 1900 the markets, on average, have tended to grow quite strongly.  Every decade obviously doesn’t work out exactly in this manner, as it is the average since 1900, but it does become a useful tool.

What this data says to me is this:  It may prove a wise decision to look at the history presented here.

  • Annual Cycle suggests: Best period to buy could be November – April each year
  • Four-Year Cycle suggests: Best market performance could happen late in the second year of a Presidential term, that would be December 26, 2018, which was the bottom so far for the current rally, continuing into the third year (2019) with this being the best performance year of the four-year Presidential cycle.
  • The Ten-Year cycle suggests: Based on history, 2019 should be a great year that leads into a possible negative period in 2020, 2021 and 2022

Perhaps starting with the dreaded “Sell in May (2020) and go away”!

Looking back at the decade cycle:

1980 – 1982 – Bad

1990 – 1992 – First Iraq war / Bush #41 Losing to Clinton, market was bottoming out toward a significant rebound.

2000 – 2002 – Tech Wreck, i.e. a wreck, not good!

2010 – 2012 – Turned out to be good, as it was a recovery from the Great Recession.  Yes, up but below the 2008 highs, as we were in the recovery stage.

2020 – 2022 – Well, I remain focused

Two WSG detail / action updates you need to keep close by are “The Exit Strategy” I wrote and emailed our clients and prospective clients on 2/1/2018.  The action data points outlined remain relevant.  In The Weekly Update on our website dated April 26, 2019, I detailed “what’s next” in trends, probability and confidence levels and concluded with the three stages of activity we may take if the valuations do as we expect and trend higher for the balance of 2019.

As always, no one knows the future. But, understanding and being thoughtful of past trends can help to add clarity to what we might reasonably expect going forward.

I am interested in your thoughts, comments and suggestions.  Call me, email or just stop by the office and say "HI"! 

Jim Lunney, CFP®


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.