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After a sizeable 8.3% rally in October, stocks went nowhere in November, bouncing around in a trading range with the S&P 500 gaining less than 0.5% last month. But we are now in the midst of what has historically been the strongest season of the year for stocks.
Does this mean new stock market highs before New Year’s? Well, not so fast.
Indeed November through January is historically the best three-month period of the year to invest in stocks. Since 1928, the S&P 500 has gained an average of 3.4% over this stretch, with positive returns two-thirds of the time.
Since 1950, the months of November and December are the two best months of the year, as the fabled Santa Claus Rally kicks in. In fact, the final 30 trading days of the year, which began just before Thanksgiving, has seen stocks trend higher for the past 12 years in a row.
But a year-end rally isn’t always in the cards and the timing can often be tricky.
Last year, for instance, the S&P enjoyed a Santa Claus Rally of 6% from Dec. 16-29, but stocks fell 5% in early December just prior to the rally. And stocks rolled over again suffering another 5% loss in early January.
This year, investors have the added drama of a Federal Reserve policy meeting on Dec. 15-16 to deal with. The Fed is widely expected to raise rates, with Fed funds futures contracts currently pricing in a 77% chance of a rate hike at this meeting.
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Could this derail a year-end stock market rally? Perhaps, but that outcome isn’t very likely for two reasons.
First, a Fed rate hike has been widely telegraphed to the market already ever since October’s bullish jobs report. Of course there’s another employment report on tap this Friday morning, and it’s possible that a disastrous result could stay the Fed’s hand.
Second, historically speaking, rising interest rates have not fazed the stock market much, at least not early on in the rate hike cycle. Since the 1950s, stocks move higher, not lower, by an average of 4.1% in the six months following the Fed’s first interest-rate increase. And stocks go on to gain 9.5% 12 months after the first rate hike, which is typically followed by more than one.
Today’s Federal Reserve is so hyper-sensitive to what would be the first increase in short-term rates in nearly a decade that they’re likely to err on the side of caution about subsequent rate hikes.
In fact, many pundits still believe the Fed could blink in December, or if they do raise rates, it may be a one-and-done move with the Fed pausing for a while — perhaps well into 2016 — before hiking rates again.
But this four-year cycle could keep a lid on stocks
Stocks may drift higher this month as investors are filled with holiday cheer, in spite of, or perhaps because of the Fed. But that doesn’t mean the market will make a beeline toward new highs either.
That’s because another powerful season tendency is at work right now that could keep a lid on the stock market well into 2016: the four-year Presidential cycle.
The chart above from Merrill Lynch graphically displays the historical incumbent Presidential cycle pattern. Note the red dotted rectangular box at right shows the phase of the four-year cycle that began in July and continues through year #4 (the election year).
This is the weakest part of the four-year cycle!
Typically stocks peak around mid-year of year #3 and choppy trading range conditions follow right through the end of the election year. Sure enough, the S&P 500 peaked in May, just prior to mid-year 2015.
If stocks keep following this pattern, you can expect more up-and-down volatility in the months ahead, and perhaps even a steeper market decline into year-end 2016.
Good investing,
Mike Burnick
P.S. Larry’ Edelson’s VITAL new report, “Supercycle 2015: Surviving ISIS, the Fall of Europe and the Death of Western-Styled Socialism” could prove to be the most PROFITABLE report you read all year.
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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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Market cap to GDP ratio shows stock prices are more than overvalued, they’re in a super bubble. They’ve been there only three times since WWII, and the other two times the markets went bust–big time. What’s more many indicators are now pointing down: LEI index is getting weaker, capacity utilization is falling, consumer confidence is falling, M2-M1 money is drying up, rate of change indicators are pointing down. About all the markets need are a trigger. And that could be the coming interest rate hike. Most AI models show a 25 percent drop in stock prices between now and April. All the major stock indexes are now stalled. If not interest rates as the trigger, maybe a Middle East event, more China woes, weak commodity prices, and generalized weak economies around the world. I’m betting you are wrong.
The market is supposed to be strong this time of the year……
BUT, the market is always full of surprises!!
I’ve heard it said that the market moves in such a way so as to cause the most pain to all those involved……
But, at least we’re making vigorous strides forward in controlling climate change. ;-/
The past few weeks the Weiss team has sent out very conflicting and confusing emails. Some say a sharp correction is imminent, others say we are in for a rally and others walk down the middle. It looks as if you guys are trying to cover all bases so one of you can claim you were right rather than a unified strategy.This makes it very difficult to gauge a reading and take firm, confident positions.
“The past few WEEKS?” Dave, they’ve been doing it for TEN YEARS. That’s their business. They don’t know what’s going to happen any more than YOU do; any more than Janet Yellen does. Their entire business is based on extracting money from folks who imagine that they are alone in not knowing what’s going on, and need a helping hand – which turns out, 90% of the time, to be a double kick in the teeth; double, in that the first kick is when you part with a fortune to sign up to some newsletter; the second is when you discover that all of their recommendations are wrong.
I tend to agree with Dave’s comment. I read in several renditions of Weiss mail out (Mike Larson) that interest rates will go north and hell break loose yet each time Fed holds their cards. Here we read a rate increase is good in beginning of cycle? I read Larry’s pub he says there will be turbulence and shake out then stock market roars? Compelling arguments for all theories but these seem all over the map so to speak. Let’s just throw darts maybe something will stick. I don’t always agree with Harry Dent but he makes a strong case and defends it to the teeth (gold down dollar’s get more valuable etc.).
“Since 1928, the S&P 500 has gained an average of 3.4% over this stretch, with positive returns two-thirds of the time.”
Wow, I can hardly wait to join the herd!
I,ve been following the market for about 50 years. Most of my major losses happened when taking the advice of others….I kind of agree with Dave. One says go all in..another speaks of impending doom. Sooner or later one can say “I told you so!”
Financial news letter advisors are like the weather forecasters -unpredictable-I agree with mike.wall street is still a rigged game and the insiders hold the ace cards-like Ronald Reagan said “trust but verify” also use common sense.