Bearish Barometer and Election–Year Uncertainty

Well, now it’s official. The January Barometer has spoken … and the reading is bearish.

For the record, the S&P 500 Index declined 5% for the month of January. This stands in sharp contrast to typical January strength, with stocks up 62% of the time historically, posting an average gain of 1.2%, according to Merrill Lynch research.

And this unusual seasonal weakness extends even further back than New Year’s Day.

In fact, the three-month period from November through January is historically the best time to invest in stocks, with the S&P up 67% of the time and posting average gains of 3.4%. But not this time.

Market history during Year 4 of a lame-duck presidency isn’t encouraging.

The S&P fell 6.2% in the three months ended Jan. 31, 2016. And that’s a doubly bearish signal for the stock market.

It’s a rare event, occurring only 20 times since 1929, but when the November-through-January period AND January itself both decline, the chances of a full-year stock market decline are 65% with an average loss of 4.7%.

The last time it happened was 2007-08. Yikes!

But wait, lately we’ve heard a lot of chatter in the financial media about how this is a presidential election year, which is typically bullish for stocks, right? Well, yes and no.

While it’s true that Year No. 4 of the presidential cycle has typically delivered solid returns of 10.4% on average since 1928, and up 73% of the time, the same isn’t true during Year No. 4 of a lame-duck presidential election year.

In fact, the last year of a two-term presidency ranks dead last by returns since 1953, with the S&P 500 Index suffering a median loss of 6.6%, according to Ned Davis Research. While it’s a relatively small sample size, the stock market has been down three out of four lame-duck election years since the Eisenhower Administration.

That’s not a good batting average, and probably has a lot to do with contentious campaigning, with market volatility on the rise as election day approaches.

Bottom line: It looks like stock investors could be in for another rocky year in 2016, so keep your safety belts securely fastened.

Good investing,

Mike Burnick

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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.