Is the Party Over?

Markets usually soften just after a new President takes the helm but based on an unpredictable 2016, anything is possible in 2017.        

By Michael Kahn              


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Saying 2016 was an unusual year is an understatement and I don’t even mean politically. On the charts, several of our cherished old saws failed to predict stock-market direction and that puts all of them in doubt for the upcoming year. However, for stock-market bulls, that might be a good thing.

To be sure, we’ve seen such mantras as “sell in May and go away” fail before, yet we still keep coming back to them as Delphian predictors.

This past year kicked off with a decline in the first week of January and a decline for the month as a whole. That led the “January barometer” to forecast a “not great year.” The theory says that “as January goes, so goes the year.”

Unfortunately, it is really only a strong January that predicts a strong year while a weak January is so-so at forecasting. The year that is now ending has seen the Dow Jones Industrial Average currently up 14% and that is near or above average, depending on how one determines what “average” actually means. In other words, the weak January predicted anything other than a strong year.

The annual stock-market cycle we call “sell in May” also did not fare well unless you count sleepless nights avoided. The Dow gained about 2% from the open on May 2 through the close in October, albeit with a few bouts of volatility.

Indeed, I wrote a column about this cycle last year where I said this cherished mantra “has gone the way of the dodo bird.”

This brings us to the Presidential cycle. Without any consideration to the specific occupant of the White House, the stock market seems to perform differently in different years of any President’s term. For Presidents in their final year we might see policies that try to goose the economy to keep the occupant and/or the occupant’s party in power. And for the first year of new Presidents, we might see the market suffer as tough new policies are enacted.

Tom McClellan, editor of the McClellan Market Report, actually breaks it down further by isolating first- and second-term presidencies.

According to his analysis, the final year of a two-term President is usually flat to down, and here is the key phrase: “on average” (see Chart 1). Cycle analysis does not guarantee any specific performance but over time it captures a tendency.

Chart 1

Standard & Poor’s 500


Referring to a new President, McClellan said, “Investors don’t know who they will get but they know it will be different. Investors don’t like change to unknown risks. They hesitate.”

Up until the election, most of the year was indeed spent moving sideways to lower, in accordance to the model. Then the pent-up energy of certainty and new hope was released.

Where do the cycles point for 2017? McClellan’s work pointed to the strong rally for the new President from a new party from the election through the end of the year. However, it looks for a soft first quarter. McClellan joked that when the new President has been in office for a whole week and has not solved all the country’s problems, investors get disenchanted.

After that, it looks for a resumption of the rally in the second quarter but in the third quarter things go a bit awry.

Just to be sure, I verified this with the work of Larry Williams, veteran trader, author and proprietor of Ireallytrade.com. Williams puts out annual forecasts based on many different cycles and also looks at the first term of a new President.

He also sees a soft first quarter followed by a strong rally into the middle of the second quarter.

From there, investors might want to pull back and sit on more cash.

Both of these cycles forecasts leave open the possibility for a run at 21,000 on the Dow as I suggested earlier this month.

The question is will these cycles work at all with a new President who is unlike any that came before him.

Certainty, the stock market reacted positively after the election as uncertainty was removed. But were all of the gains to be attributed to the first half year of the new administration already made so that the market will not follow the average path?

Considering that most other market patterns did not do what they were supposed to do it might be a hard to believe these cycles. But since there is no crystal ball we have to take the evidence the market gives us – which are cycles that are still working over recent memory – and stick with them.

Indeed, it is a brave new world in stock-market investing where the rules are changing and we need to adapt by following along, not hanging on, old saws.


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