Research.LeutholdGroup

Does the market’s poor YTD performance prior to the six-month “Sell in May” combined with the Presidential Election Cycle help “inoculate” it against a typical mid-year, mid-term swoon? Yes, there’s some evidence to support that view—especially with Small Caps.

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Next month kicks off the seasonally-weak phase of the stock market’s Annual Cycle: May-October. Overlaid on that is the statistically vulnerable stretch of the four-year Election Cycle: the “mid-point” of the Mid-Term Year. There’s a positive way to spin this mid-term malaise: The cycles imply that an ideal window for a major low is about to open.

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In the March Green Book, we discussed the long history of stock market difficulties during mid-term election years. Incredibly, nine of the past 11 cyclical bear market lows have occurred in these years, with eight of those nine recorded during the seasonally-weak months of May through October (Table 1).

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Our bearish stance could be tested by the arrival of the seasonally strongest six-month window of the four-year electoral cycle. Since 1926, November of the mid-term year through April of the pre-election year has produced an average un-annualized S&P 500 +16.4% total return.

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While mid-term elections are rarely big market movers, this year’s election demands more attention as it has the potential to alter the balance of political power in Washington.

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“That which does not kill us, makes us stronger” might be a good motto for this never-ending bull market. The bull continues to shrug off the effects of both Quantitative Tightening and an escalating trade war, and it’s doing so during a seasonal stretch in which many of its predecessors have sunk to their knees (if not their demise).

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The coming months form a bearish cross-section of two of the most prominent calendar anomalies: “Sell In May,” and the Presidential Election Cycle (in which the mid-term year is statistically the weakest). Between the two, we’d have to rate the former as more powerful and statistically persistent.

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Athletes aren’t the only ones known to sometimes suffer a “sophomore slump.” Presidents do, too… at least according to the historical verdict of the stock market...

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The prospect of a mid-term congressional shake-up may rattle the markets in 2018. Since 1962, nine major bear market lows occurred during mid-term election years, with eight of those happening during the traditionally weak months of May through October.

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General patterns are a weaker dollar, rising stocks and range-bound bond yields.

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