Q & A with Jeffrey Hirsch, Editor-in-Chief of Stock Trader's Almanac
What is the biggest trend in the markets to watch for 2013 and how can investors prepare for it?
Jeffrey A. Hirsch
There are three key trends for investors to prepare for in 2013. We remain in a secular bear market that began in January 2000 and will likely continue for another five-six years, depending on how the end of combat operations in Afghanistan play out and how quickly the world's debt, deficit, recession and financial woes are remedied.
The four-year presidential cycle has created a pattern where post-election years are the worst performing. 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. Seasonal economic behavior has pushed most of the market gains into the six consecutive months November through April. So investors should be prepared for lackluster market action in the latter half of 2013 by taking profits and getting defensive in the spring. What differentiates the Stock Trader's Almanac approach to investing from other approaches out in the market?
The Almanac has been instrumental, if not the foremost champion, in convincing investors, traders and money managers of the importance and benefits of using historical market cycle analysis to increase profits and reduce risk. Our extensive knowledge and understanding of recurring market cycles and seasonal patterns is used in conjunction with fundamental analysis, technical analysis, and economic and monetary policy analysis. We also take into consideration sentiment and psychological factors as well as market internals. The Almanac is often quoted in the media and is famously known for a few key indicators that you follow. What are these indicators and how can investors trade them?
Perhaps the most well know is the January Barometer. Devised by Yale Hirsch in 1972, our January Barometer states that as the S&P 500 goes in January, so goes the year. The indicator has registered only seven major errors since 1950 for an 88.7% accuracy ratio. Bear markets began or continued when Januarys suffered a loss. Should January 2013 be down, that would be a signal that 2013 is going to be a tough year for stocks.
But before the January Barometer's reading is registered there is the Santa Claus Rally. Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January. This has been good for an average 1.6% gain since 1969 (1.5% since 1950). Santa's failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices. When we discovered this phenomenon in 1972, we coined the phrase: "If Santa Claus Should Fail to Call, Bears May Come to Broad and Wall."
The most reliable trading pattern is our Best Six Months Switching Strategy. The saying "Sell in May and Go Away" has become quite well know. 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.
From the Book: Trends to Watch and Trade in 2013 Post-Election Years Worst Year of the Four-Year-Cycle: Paying the Piper
It is no mere coincidence that the last two years (pre-election year and election year) of the 45 administrations since 1833 produced a total net market gain of 724.0%, dwarfing the 273.1% gain of the first two years of these administrations. Politics being what it is, incumbent administrations during election years try to make the economy look good to impress the electorate and tend to put off unpopular decisions until the votes are counted. This produces an American phenomenon-the Post-Election Year Syndrome. The year begins with an Inaugural Ball, after which the piper must be paid, and we Americans have often paid dearly in the past 99 years. Market Behavior After Sitting President Wins And Losses
Since the inception of the Dow Jones Industrial Average in 1896, there have been 19 presidential elections that a sitting president was running for reelection. The Dow posted gains in 9 of these 19 post-election years. A struggling economy, European financial and political duress, ongoing foreign military operations, and a divided Washington are likely to keep a lid on the market in 2013. Prospects for 2013 improve should the market decline dramatically during the latter part of 2012. Post-Election Year Performance by Party
There is a dramatic difference in market performance under the two parties in postelection and midterm years the last 15 administrations. More bear markets and negative market action have plagued Republican administrations in the post-election year whereas the midterm year has been worse under Democrats. Market Fares Better Under Democrats; Dollar Holds Up Under Republicans
Since 1901, the Dow has averaged annual gains of 6.4% during Republican eras while the dollar has declined to 29 cents. During Democratic eras, the Dow has average annual gains of 13.0% and the dollar has declined to 11 cents. Under Obama, the Dow has gained 28.5% while the dollar has lost 5.8%, since Election Day 2008. There have been 14 recessions and 18 bear markets under the Republicans and 7 recessions and 16 bear markets under the Democrats. Republican Congress & Democratic President Best for the Market
Historical performance of the Dow under Democratic and Republican presidents demonstrates a pattern that is contrary to popular belief. Under a Democrat, the Dow has performed better than under a Republican. The Dow has historically returned 10.0% under Democrats compared to 6.8% under a Republican executive.
With total Republican control of Washington, the Dow has been up on average 14.1%. Democrats in power of the two branches have produced an average Dow gain of 7.4%. When power is split, with a Republican president and a Democratic Congress or a split Congress, the Dow has not done very well, averaging only a 5.4% gain. The best scenario for all investors has been a Democrat in the White House and Republican control of Congress, with average gains of 19.5%.