THE BLOG

Market Timing and Election Years

06/16/2015 01:58 pm ET | Updated Jun 16, 2016

No one can forecast the stock market correctly all the time. But that doesn't mean the stock market -- and individual stocks -- don't have patterns that could meaningfully add to your profits, if you have the discipline to study and follow the "signals" sent by market activity.

Oh, and no one is selling those market timing "secrets" for $139 a year! If they really knew for sure, they'd just trade the markets themselves and make a fortune!

That said, history can be a good guide and a helpful tool in considering entry and exit points in the stock market. I caution that this information is especially helpful for those with time and energy to concentrate on the stock market.

Ordinary investors, contributing to a company retirement plan or IRA, are likely far better off to just continue to invest regularly in a diversified portfolio of mutual fund -- or simply buy an S&P 500 stock index fund. Remember, last year 84 percent of mutual fund managers failed to beat their "benchmark" -- typically the S&P 500. And they get paid to beat the averages!

But that doesn't keep investors from trying to outperform. And one of the most interesting perspectives on market "timing" comes from the "Stock Trader's Almanac," which for the past 49 years has compiled seasonal trends and historic data to help investors make market decisions. Editor Jeffrey Hirsch has created a series of references specific to market returns in election years.

The Stock Trader's Almanac Election Year Patterns

Some of the most interesting historic patterns in the almanac relate to election years and pre-election years. For example:
--The Dow Jones Industrial Average has not had a loss in the pre-election year (the third year of the presidential election cycle) since 1939, when Germany invaded Poland. The same was true for the S&P 500 -- no losses in the third year since 1939 -- until 2011, when it was down 0.04 points or 0.003 percent. Close call!

--The presidential cycle "sweet spot" is ending now. Historically, the best period for investing in stocks is the three-quarter period that includes the fourth quarter (Q4) of the midterm year, and Q1-Q2 of the pre-election year. That period ends June 30.

Since 1949, this "sweet spot" has returned average gains of 21.6 percent for the DJIA, 22.2 percent for the S&P 500 and 34.1 percent for the NASDAQ (since 1971). Returns, so far, for the nine-month sweet spot period have lagged, though the markets are higher. Through early June, the gains are: DJIA up 4.7 percent; S&P 500 up 6.1 percent; NASDAQ up 12.8 percent.

--The seventh years of a two-term presidency have largely underperformed other pre-election years. While pre-election years have posted gains of as much as 13 percent, the seventh year of a two-term presidency has returned only half that amount.

So election-cycle history says that most of the market's best gains may be behind us. What other cycles may impact the market at this time? According to the "Stock Trader's Almanac," we are entering into the annual "worst six months" period -- a term coined by the Almanac.

Basically, it says the S&P 500 gains, on average, less than 1 percent in the June-October period following gains in pre-election year Mays (since 1950). You have to think about that for a minute! But essentially, according to the almanac, "the odds are nearly 50/50 that June through October will produce an average gain of just 0.87 percent this year." That's discouraging!

A Correction Ahead?

And for those of you interested in annual cycles, there is the old "sell in May and go away" cycle -- one that traditionally reflected the tendency of stockbrokers (think 20th century) and politicians to go on vacation in the summer months, slowing trading volume and volatility. The almanac says that the pre-election year is not the best time to employ this strategy, but that a correction in the market this summer cannot be ruled out -- especially as this now becomes officially the third longest period without a 10 percent correction.

It is said those who do not learn from history are condemned to repeat it. And when it comes to markets, that is really the Savage Truth.