- What impact do you think the 2012 presidential election will have on investors?
Presidential elections every four years have a profound impact on the economy and the stock market. After a president wins the election the first two years are spent pushing through as much policy as possible. Frequently the market, economy, and country experience bear markets, recessions, and war. Since 1941, the post-election year has posted the lowest average gain for the Dow Jones Industrials at 4.5%.
Seasonality has been on track since September 2009. 2011 unfolded in near textbook fashion. 2012 is also unfolding in rather typical seasonal and election year fashion. The catalyst for 2011's decline was persistent European debt concerns. These sovereign financial troubles continue to pressure markets. Slowing growth in emerging markets, a historically weak post-election year track record, the expiration of tax cuts, and unemployment benefits at yearend is likely to make for an exciting three-ring circus in D.C. after Election Day and plague stocks in 2013. Markets do not like uncertainty.
Unless a full-blown bear market occurs in 2012 or the market slogs along into the New Year, market gains will be harder to come by in 2013 than they have since the March 2009 bottom. A more likely scenario is that seasonal and economic softness gives way as the presidential election approaches and some resolution in Europe coincides with at least the hint of an easing move from the Bernanke Fed.
If things look good for Obama, October is likely to be stronger. If Romney wins, expect a bigger move in November. Either way, there have been only two losses in the last seven months of election years for the S&P 500 since 1952. Also on the bright side for 2012, the DJIA has averaged 9% in years when a sitting president was running for reelection; win or lose.
2013 is another story. Markets are likely to come under pressure as whoever the president is will have tall orders to remedy the economy, the deficit, and the dysfunctional government. The easy economic data and corporate results comparisons of the past few years will be gone. Foreign hot spots and diplomatic issues will also require renewed attention from the White House once the campaigning and/or inaugural balls are over. Central banking will remain accommodative, but there is little more they can do. After the yearend rally and positive 2012, I am concerned that the next major bear market will occur in the 2013-2014 period.
- What are some of the cycles you talk about in the Little Book and how can investors use those?
In the Little Book of Stock Market Cycles I have boiled down all the most pervasive and persistent market patterns. From our nearly 50 years of research these are the ones that continue work. I begin with the long term, multi-year secular bull and bear market patterns. Then I delve deep into the nuances and details of the four-year presidential election stock market cycle, the perennial seasonal pattern before I drill down into the prevailing monthly, weekly and daily patterns. Whether you are day trading, trend trading or investing for the long haul the Little Book provides insight, guidance and confidence when you are making buy and sell decisions.
- What's the best time of the year to trade the market?
The best time of the year to go long stocks is October and the best time to sell is April. This is our Best Six Months Switching Strategy that we discovered in 1986. The saying "sell in May and go away" has become quite well known. But I am amazed at how few fail to realize, and capitalize on, the flip side of this phenomenon. You can't sell in May if you don't buy in October. Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950. Our Best Months Switching Strategy will not make you an instant millionaire, as other strategies claim they can do. What it will do is steadily build wealth over time with half the risk (or less) of a "buy and hold" approach.
Generally speaking, during the Best Months you want to be invested in equities, mutual funds or exchange traded funds (ETFs) that offer similar exposure to the companies that constitute the Dow, S&P 500, NASDAQ and Russell 2000 indices. During the Worst Months, switch into Treasury bonds, money market funds, or a bear/short fund. Grizzly Short (GRZZX) and AdvisorShares Active Bear (HDGE) are two possible choices. Money market funds will be the safest, but are likely to offer the smallest return, while bear/short funds offer potentially greater returns, but more risk. If the market moves sideways or higher during the Worst Months, a bear/short fund is likely to lose money. Treasuries offer a combination of decent returns with limited risk. In the 2013 Commodity Trader's Almanac, a detailed study of 30-year Treasury bonds covers their seasonal tendency to advance during summer months as well as a correlating ETF trade.
Additional Worst Month possibilities include precious metals and the companies that mine them. SPDR Gold Shares (GLD), Market Vectors Gold Miners (GDX), and ETF Securities Physical Swiss Gold (SGOL) are a few well recognized names available from the ETF universe. Gold's seasonal price tendencies are also covered in the 2013 Commodity Trader's Almanac.
The quarterly and annual operations of institutions and the seasonal behavior of society and individuals have created a Best and Worst six months of the year. Our Best Six Months Switching Strategy revolves around the fact that most of the markets gains occur from November to April while the market is usually flat to down from May to October. 2012 is a case in point.
There is and ebb and flow of cash and trading volumes that is clearly influenced by the perennial activities of institutions individuals and society. Market seasonality is a reflection of cultural behavior. In the old days, farming was the big driver, making August the best market month-now it's one of the worst. This matches the summer vacation behavior where traders and investors prefer the golf course, beach, or poolside to the trading floor or computer screen. Institutions' efforts to beef up their numbers help drive the market higher in the fourth quarter as does holiday shopping and an influx of year-end bonus money. Then there's the New Year, which tends to bring a positive new-leaf mentality to forecasts and predictions and the anticipation of strong fourth- and first-quarter earnings. After that, trading volume tends to decline throughout the summer and then in September there's back-to-school, back-to-work, and end-of-third-quarter portfolio window dressing that has caused stocks to sell off in September, making it the worst month of the year on average.
- Would you say that history repeats itself? Why or why not?
History never repeats exactly, but is sure does rhyme. The collective human memory is short and the forces of greed and fear are unrelentingly powerful. As George Santayana famously said, "Those who fail to remember the past are condemned to repeat it." I like to say, "Those who stuffy market history are bound to profit from it."