My ongoing expectation for 2014 is that stocks are going to struggle and better returns will likely be found elsewhere. I have a list as long as my arm as to why, many I have written about here on the blog but the rest in personal conversation with clients. There are two major seasonality patterns on that list that keep me awake at night. The first most everyone is aware of as it has been beaten to death in the media (including by me) which is the “Sell in May” scenario. While it did not work out last year the statistics are unbelievably compelling and the fact that last year did not play out just increases the odds it works this year. The second and less well known of the two major seasonality patterns is the presidential cycle. What this shows is that the second year of the presidential term is the worst especially during the May to October time frame. And to add even more bearish overtones, the second year of a president in his second term is almost 2x worse than one in his first.
Below is a chart illustrating historical performance of the presidential seasonality scenarios described above. The green line is the average historical performance of the SP500 by month of the second year of all presidential terms. The red line show historical performance of the SP 500 by month of the 2nd year of a president only in his second term. The black line is 2014 year-to-date. What should jump out at the reader is under both historical seasonality scenarios is the markets top out in April and decline through October. The other major take away is that when the summer-fall weakness subsides, the 4th quarter has been a great time to insure you are invested in stocks as returns have averaged between 7-10%.
If the presidential cycle is going to work out this year it will require a slight modification. Instead of topping in April, it will have to change to May since last week market highs inched above those made in April on the broadest of market indexes. Based upon the presidential cycles the higher probability trade is in the bear camp so investors who are long the market should consider being not too long.