Cycles under the Loupe
Pfäffikon SZ, Switzerland – The financial markets are much more difficult to understand today than they were about twenty years ago. That’s why I use a different method than usual. One of the many factors I observe is cycles. The period between November and January has been a cycle in which stocks have generally done well. Thus, the recent Christmas rally is one of short duration within this cycle. But the longer cycles are also interesting and, surprisingly, many are coming together in 2014.
Presidents Cycle
I have told you several times about the so-called Presidential Cycle. It’s the cycle associated with the U.S. presidential elections. It does not matter whether the Democrats or Republicans are in power. It’s a cycle that as investors, we definitely need to take seriously. In 2014, we moved from a post-election year to a gap year. And gap years historically tend to represent poor investment years. The theory behind this is that presidents try to make a good start by making lots of promises to keep everyone happy. Then they are required to take unpopular measures to put things right. And that puts the general population on the wrong foot. In the last two years of their presidency, presidents tend to be very positive in preparation for their upcoming re-election or to support their own political party.
The reasoning behind this is less important than the actual statistics. According to the Presidents Cycle we are at the beginning of the worst period, which will continue for approximately thirteen months. This is interesting because, based on this cycle, the pre-election year (2015) and the election year itself (2016) will be the best periods for shares. The pattern tells us that a significant correction is imminent and that the period will end in September of this year.
Ten-Year Cycle
Another cycle that we have to deal with is the ten-year cycle. Yesterday, the stock market began its fourth year of the ten-year cycle. The track record of the fourth year is usually considered to be quite good. However, this cycle is not always consistent. Based on the ten-year cycle, the fourth year has only closed positively two out of three times. The fifth year is, however, a backup. The fifth year within this cycle is, without exception, the best year. Eleven out of twelve times, the indices have closed higher. And the twelfth year loss was very limited. This suggests that any downturn in the markets will provide an excellent buying opportunity in that year.
Bull or Bear
The last cycle I would like to point out is that the market is always in a long term bear or bull market. Opinions differ and can be endlessly debated. Historically, the S&P 500 has managed to recover from a downward pattern every time. The question is whether this is going to happen again after the sharp correction of 2009. It is not unusual for the market to make another large correction before the beginning of a new bull market can be confirmed.
Correction on the Horizon
Based on these three cycles meeting in 2014, there is a possible scenario that, in the very short term, new all-time highs will be made. This is due to the influx of insurance premiums, which must always be invested. After that, a large correction may occur. This would present the ultimate buying opportunity that may even be the prelude to a new secular bull market.
It remains for me to wish you a successful 2014.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
